Handle With Caution: Trading T-Mobile US, Inc. Stock on Sprint Merger Talks

For the third time in four years T-Mobile and Sprint are discussing a potential merger. Buying T-Mobile stock is a no-brainer if you're bullish on the situation, but you need to protect your investment.

Merger Speeds Up the Comeback of T-Mobile US Inc (TMUS)

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T-Mobile US, Inc. (NASDAQ:TMUS) and Sprint Corporation (NYSE:S) are reportedly back at the bargaining table.

For the third time in four years, the No. 3 and No. 4 wireless carriers are weighing the pros and cons of combining forces to battle AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ).

The fresh round of talks, reported by The Wall Street Journal, comes just five months after the two broke off a potential merger deal back in November. According to Tim Hoettges, CEO of T-Mobile parent Deutsche Telekom, merger talks were called off because the deal wouldn’t be good for shareholders.

While Sprint has continued to languish during the past four years since the pair first entertained ideas of a merger, T-Mobile stock has flourished. The self-proclaimed “un-carrier” has since passed Sprint to claim the No. 3 spot behind AT&T. Fueled by unconventional wireless plans, aggressive customer acquisition plans, innovative marketing and the promise of free Netflix, T-Mobile has become a force to reckon with.

As with the previous two meetings of these wireless providers, there are still plenty of risks for traders to weigh. With the current administration in Washington, regulatory issues could be a major sticking point with the deal. The U.S. Justice Department is already going after AT&T for its Time Warner Inc. (NYSE:TWX) acquisition deal.

Or it could not be an issue at all. After all, the DOJ had nothing to say about Walt Disney Company’s (NYSE:DIS) acquisition of the majority of 21st Century Fox Corp (NASDAQ:FOXA).  

Combine this regulatory uncertainty with T-Mobile and Sprint’s history of arguing who should lead a combined company, and you have quite a volatile situation.

T-Mobile Stock
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Should the deal go through, the combined company would certainly be a buy given its strength to take on both AT&T and Verizon.

But while Sprint is perennially inexpensive, T-Mobile stock is the stronger of the two in the long run — and the one you should consider buying if you are looking to bet on a positive outcome for this fresh round of talks.

Technically speaking, bullish expectations for a Sprint deal is the only reason to buy T-Mobile stock right now. The shares were a buy last week as they tested the lower end of their recent trading range.

Now, however, TMUS is near the top of that range. Resistance is looming large near $65, and could create short-term headwinds in the absence of bullish news on the merger front.

Trading T-Mobile Stock Amid Sprint Merger Talks

That said, assuming you are looking to buy TMUS stock in a bid to take advantage of the potential buyout, you can use TMUS options to protect your investment entirely or limit losses.  Specifically, traders might want to consider buying T-Mobile stock with a TMUS married put position for protection.

To implement this strategy, you would purchase one front-month at-the-money or out-of-the-money TMUS put for every 100 shares of T-Mobile stock. The strike of the purchased put should reflect your risk tolerance – i.e., an at-the-money May $62.50 put offers near full protection, while an out-of-the-money June $60 put would allow for some slippage in T-Mobile stock to account for volatiltiy.  

For example, let’s say that you want to buy 100 shares of T-Mobile stock (currently trading for roughly $63 per share).  You could protect those shares by purchasing one May $62.50 put, which was last asked for $2.02, or $202 per contract. In the end, the total cost for your option position would be $202, while the stock position would total $6,250 (excluding brokerage fees, of course).

In this trade, the put option acts as short-term insurance for the long stock position. If T-Mobile stock closes below $62.50 per share when May options expire, you would be able to exit the position while suffering only minor losses — the cost of the purchased put and the different between the put strike and your T-Mobile stock purchase price. Finally, if TMUS stock holds above $62.50 through May expiration, you can roll the put forward to June if you feel you still need the protection.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/04/handle-with-caution-trading-t-mobile-us-inc-stock-on-sprint-merger-talks/.

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