T-Mobile US Inc (NASDAQ:TMUS) always finds itself in the news. Yesterday we saw it spike 5% on a rehash of an old headline. Buyers piled into the stock thereby saving it from technical breakdown that could have retested the sub-$60 per share level.
Today, I want to chase the bulls into TMUS stock. No, I won’t buy the shares outright as I have some concerns with some aspects of its business, mainly margins. So I will use options where I can better control the placement of my risk.
It’s never ideal to go along a stock that popped 5% on a headline. But therein lies the opportunity in the headline itself. Acquisition rumors have been around T-Mobile stock for months and I don’t think it’s going to change anytime soon.
So this builds an inherent value under it just from that fact alone. This is in addition to the fundamentals of the stock itself.
This tells me that TMUS bulls will step up and buy the dips in the stock if and when they happen. This is a thesis against which I can sell puts for income. TMUS around $59.00 per share is a battle zone. Up until January, this was a resistance area. But since then traders have used it as support and the basis for two extended rallies.
So with no change in the macro-economy or company fundamentals, I expect that zone to hold for a few more months. I do have to acknowledge that if it doesn’t hold and if it fails then $56 would be the next level to test. This is not a forecast, I just need to be aware of it and leave enough room in my trade set up in case it does happen.
Click to Enlarge TMUS is not cheap. Its price-earnings is almost twice as much as that of Verizon Communications Inc. (NYSE:VZ) or AT&T Inc. (NYSE:T) even though it offers no dividends. Yet, so far wall street has given it the benefit of the doubt perhaps because of its loudmouth CEO who keeps it in the news in exciting ways.
Case in point is their most recent promotion where they give away Netflix, Inc (NASDAQ:NFLX) accounts with their new signups. This pricing battle is causing havoc in this sector. It’s music to my years as a consumer but in the long run, it’s not good for business for T-mobile.
The Bet: Sell TMUS Jan 2018 $55 put and collect 70 cents per contract. This is a bullish trade where I have an 85% theoretical chance that price will stay above my strike. Otherwise, I own the shares and could accrue losses below $54.30.
Not all traders like selling naked puts. Those who want to mitigate risk can sell spreads instead.
The Alternate Bet: Sell Jan 2018 TMUS $55/$52.50 which would yield 8% on risk with about the same odds of winning. In either of these trades, I don’t need a rally to profit. All I need is for TMUS to not fall more than 15% by Jan 2018.
I come into this trade with profits in hand from this successful June trade that I shared. Still investing in the stock market carries risk so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.