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Bearish Speculation Surges in Sprint Nextel

Speculators are buying S puts at a near annual-high clip

by 12/3/2012 1:16 PM
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Despite outperforming the broader S&P 500 Index (SPX) by nearly 15 percentage points during the past three months, Sprint Nextel Corporation (NYSE:S - 5.73) puts remain the options of choice. At last check, the telecom titan has seen roughly 7,500 puts change hands -- a 45% increase to its average intraday put activity, and nearly double the number of S calls exchanged.

Most active have been the January and February 4-strike puts, which have seen around 2,000 and 2,800 contracts traded, respectively. The bulk of the puts have crossed at the ask price, and implied volatility was last seen higher at both strikes, hinting at buy-to-open action. More specifically, the volume-weighted average price (VWAP) of the January 4 puts is $0.03, while the VWAP of the February 4 puts is $0.05.

By purchasing the puts to open, the buyers have one of two motives: to profit from a significant retreat within the next few months, or to protect a long stock position. In the case of the former, the January-dated put buyers will make money if S breaches the $3.97 level (strike minus average premium paid), while the February-dated put buyers will reap a reward on a move south of $3.95.

In the case of the latter, the buyers are shareholders above all else, meaning their primary goal is for S to extend its upward advance. The purchased puts merely lock in an acceptable exit price for their S shares, should the stock take a turn for the worse in the short-to-intermediate term.

Whatever the motive, today's affinity for S puts merely echoes the growing trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The stock's 10-day put/call volume ratio on the exchanges sits at 0.68, in the 93rd percentile of its annual range. Or, in simpler terms, option buyers have scooped up S puts over calls at a near annual-high clip during the past couple of weeks.

Likewise, the security's Schaeffer's put/call open interest ratio (SOIR) sits at 1.00 -- above 75% of all other readings during the past year. In other words, near-term options traders are much more put-heavy than usual right now.

At last look, the shares of S are dawdling around breakeven at the $5.73 marker. From a longer-term perspective, the equity has more than doubled over the past six months, ushered higher atop its 10-week moving average.


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