These days there are plenty of varied viewpoints and conversations on where Sprint (NYSE:S) is heading. But for bullish investors committed to doing more than just talk, a marriage of call options in Sprint stock to gain long exposure looks like smart business. Let me explain.
The proposed $26 billion merger between mobile telecom disruptor T-Mobile (NASDAQ:TMUS), the country’s third-largest provider, and the market’s distant fourth outfit, Sprint, has been one filled with public opinion over the past year. But on the heels of last Monday’s unexpected favorable verdict by the Federal Communications Commission, that debate has intensified.
From gloomy Gus anti-trust types to optimistic advocates that see an already oligopolistic industry controlled by Verizon (NYSE:VZ), AT&T (NYSE:T) and T-Mobile as becoming more competitive and fair for consumers under the deal’s pledged key concessions, the S stock merger discussion is a hot topic to say the least.
As it stands for Sprint stock, all eyes and ears are waiting on the Department of Justice to chime in with its ruling following the more influential FCC’s blessing. When that verdict will be announced is anybody’s guess, but it’s likely to happen sooner rather than later.
If the DOJ approves the deal, the merger has an assigned value of .01056 TMUS shares for every one share owned of S stock. As of Friday’s close, and with T-Mobile at $77.27, that makes Sprint stock worth $8.16 upon a blessing from the DOJ.
On the other hand, if regulators refute the FCC’s decision, the consensus view is S stock would quickly be worth a good deal less. Compared to Friday’s close of $7.16, a year ago and just prior to the first whiff of a merger with TMUS, shares of Sprint were trading under $5. What’s more, many pros see that price as a gift to S stock investors if the deal is nixed.
Sprint Stock Monthly Price Chart
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To be clear and what the provided monthly chart doesn’t show, Sprint stock has much larger-than-normal chance for increased gap risk. That type of volatility can work both ways. But based on what has been discussed, downside exposure does appear to be much larger than the reward potential for holding long S shares. That’s concerning, but it’s also not all that matters.
Assigning the likelihood of one outcome versus the other is key to investing in Sprint. Is S stock a 50/50 gamble like InvestorPlace’s Dana Blankenhorn wrote in a recent article? Could Sprint be a much more bullishly conceived situation as drawn up by Luke Lango? Or are the odds really stacked in the bears’ favor? Similar to Dana, I’m on the fence. Admittedly though, the chart is tempting.
The monthly chart shows Sprint stock’s reaction high to the FCC ruling challenged but failed to break above Fibonacci-based and angular trend-line resistance. That’s a technical obstacle until it is overcome. Moreover, given the $8.16 target price for S shares based on TMUS’ Friday close is within this resistance area, that’s a dollar of profit or 14% return without requiring a full-blown breakout.
Technically, that’s not all Sprint stock has going for it either.
Sprint Stock Daily Chart
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Sprint stock’s daily chart shows a simple pullback pattern has formed. And with Friday’s technical signal confirming a low off price support is in place, Sprint bulls appear to have the trading edge right now. Nevertheless, bullish investors should be cautious.
Ultimately, deal stocks like Sprint do have a history of challenging traders committed to the price chart for buying and selling decisions. That can’t be stressed enough. Furthermore, S stock’s options market isn’t indicating any sort of advantage to the bull case in terms of volume, open interest or volatility skew.
With caveats in place, if bullish investors are inclined to position long in S shares I’d recommend the options market. One opportunity that fits in nicely with the situation on the Sprint stock charts is marrying the long June $7.50 call with a short June $8.00 call. This union forms a bull vertical call spread that reduces and limits risk to a finite dollar amount … which in our estimation looks 100% like smart business.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
