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Sprint Corporation (S) Trader Looks to Profit On a Drop In Volatility

Sprint Corporation's front-month options are used to initiate a short straddle

by 6/2/2014 1:25 PM
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Option Brief: Sprint Corporation (NYSE:S) spent last month churning between $8.70 and $9.70. The equity is kicking off a new month of trading near the high end of this range, up 1.3% at last check to linger near $9.67. One speculator in today's session is gambling on the stock to stick close to present trading levels over the next several weeks -- or is perhaps banking on a drop in volatility -- by initiating a short straddle in the front-month series of options.

Within the first hour of today's trading, two symmetrical blocks of 1,939 June 10 puts and calls were sold at the respective bid prices of $0.62 and $0.31 apiece, resulting in a net credit of $0.93 per pair of contracts. Meanwhile, implied volatility edged higher at each leg, indicating the initiation of new positions. Data from the International Securities Exchange (ISE) also suggests that the blocks were opened.

Ideally, S will finish right at $10 at the close on Friday, June 20, when front-month options expire. In this best-case scenario, both contracts will expire worthless, and the trader can retain the initial net credit received as her maximum potential reward. However, she is still able to profit as long as S settles between $9.07 (strike price less net credit) and $10.93 (strike price plus net credit) at expiration. The short straddle isn't for the faint of heart, however, as losses are theoretically unlimited on a sharp move to the upside, and can be quite significant on a steep plunge to the downside.

As mentioned, though, this short straddle player may be looking to capitalize on a drop in Sprint Corporation (NYSE:S) volatility over the next several weeks. At present, implied volatility on both the June 10 put and June 10 call are inflated relative to the stock's 20-day historical (realized) volatility (50.5%, 49.5% vs. 33.6%, respectively). In other words, these options are more expensive than usual, from a historical standpoint, making now an opportune time to sell premium. Her goal, therefore, would be to see IV levels drop off ahead of expiration, making it less expensive to buy (to close) the contracts.

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