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Option Bears Swipe at Sprint Nextel

S speculators open a bearish put spread following CLWR news

by 12/11/2012 2:41 PM
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If today's trading activity is any indication, the Sprint Nextel Corporation (NYSE:S - 5.60) options crowd remains blanketed in pessimism. More than 61,000 put contracts have traded on the telecomm stock today; this is more than eight times the typical intraday volume, and nearly double the number of calls that have changed hands.

Two popular strikes today are the February 5.5 and 4.5 puts, which have each seen more 10,000 contracts trade. In fact, blocks of 10,000 traded simultaneously in early afternoon trading, as a speculator may have opened a bear put spread on S shares. The near-the-money put traded at the ask price of $0.16 per contract, while the 4.5-strike puts went off closer to the bid price -- at $0.04 per contract -- for a net debit of $0.12 per spread.

The maximum profit on this position -- should S breach the $4.50 level by February options expiration -- is $0.88, or the difference in strikes less the premium paid. The maximum loss -- on a close at or above $5.50 -- is 100% of the $0.12 debit. Breakeven at expiration, meanwhile, is $5.38 (long strike less debit), which is almost 4% south of the stock's current perch.

Today's trading is merely a continuation of a recent trend; just last week, my colleague Andrea Kramer observed heavy trading on out-of-the-money S puts. The 10-day put/call volume ratio measuring buy-to-open activity at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) currently stands in the 82nd annual percentile. In other words, the speculative crowd has leaned more toward the put side of the fence just 18% of the time during the past year. Elsewhere, the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.02 indicates that puts and calls with under three months until expiration are near parity. What's more, this ratio is higher than 74% of all data points taken during the past year.

This skepticism from the options crowd comes despite the stock's relative-strength outperformance of the S&P 500 Index (by 12 percentage points in the past three months) and its 139% gain in 2012 to date. This month, however, S has given back about 2.6% so far. The stock is in the red today after the company announced plans to acquire the 49% minority stake in Clearwire Corporation (NASDAQ:CLWR) that it did not already control.


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