As addicted as we’ve become to our smartphones, and thus as saturated as the market has become, I believe there’s enough room for all providers to prosper. There will be distinct winners, and the rest will be assimilated. Thus, the downside risk to Sprint Corp (NYSE:S) and other telecom stocks is limited. Today, in fact, I have a long play on Sprint stock to share.
Although T-Mobile US Inc (NASDAQ:TMUS) takes the trophy for highest-profile competitor because of its borderline trouble-maker CEO, Sprint stock is keeping stride with it in spite of questionable fundamentals. Luckily I’ve been profitably long those two, and also Verizon Communications Inc. (NYSE:VZ), using options.
So I practice what I preach already, and I plan on repeating performance today.
The Setup
Back in June, I profited when I sold put options in S. Today is merely a rinse-and-repeat setup that continues to work. This is especially easy in an uber-bullish equity market like this.
Click to Enlarge S stock had been struggling coming into these earnings. It was down 3% on Monday and down 15% since last time it reported. But it wasn’t all bad news, as shares still were up 30% over the past 12 months. Sure enough, this morning’s reaction of +10% confirms my thesis and adds resolve to my bet.
These days, Wall Street favors the two that are the least profitable; S and TMUS by far beat VZ, despite the latter’s better fundamentals. Investors just aren’t looking for value; this seemingly illogical behavior is probably due to the rumor mill of mergers and acquisitions.
But that’s fine. Today’s trade isn’t an argument for value.
The setup here is a pure bet on price action. I want to sell risk below levels that other investors fear and I think will hold. If price stays above those levels, then I keep the premium that I collect to open the trade as maximum gains.
How to Trade Sprint Stock
The bet: Sell the S Feb 2018 $7 naked put and collect 70 cents to open. Here my odds of success are close to a coin flip, but I don’t fear owning Sprint stock at $7. I am confident that in that case, I would be able to manage out of them fairly well. If price falls below $6.30, though, I will suffer.
Not all investors want to sell naked puts. For those, I’d sell put spreads instead and thereby limit the amount at risk.
The alternate bet: Sell the S $7/$6 credit put spread, where I have the same odds of success but I can still earn a 35% yield for my efforts.
Much like last time I did this trade back in June, I again need to acknowledge the technical danger of retesting $6.50 or lower. Last time my trade paid me well, so I come into this one with profits in hand, thereby giving me a bit of extra courage.
The alternate way to participate with Sprint stock is to chase it by paying face value for it and hoping for higher prices. Here, I only need it to stay above my strike.
Selling options is risky business, so never risk more than you’re willing to lose.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
