Option Bears Target Surging Sprint Corp (S) Amid M&A Chatter

Sprint Corp (S) just hit a fresh two-year high after SoftBank CEO met with President-elect Donald Trump, but the stock is surrounded by considerable pessimism

Dec 7, 2016 at 2:52 PM
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Sprint Corp (NYSE:S) is getting a major boost today, after yesterday's meeting between SoftBank CEO Masayoshi Son and Donald Trump prompted the president-elect to tweet about a potential $50 billion investment from the Japanese firm. Considering SoftBank is a majority owner in S, an analyst at Oppenheimer said the meeting could possibly "be a precursor" to a merger between Sprint, T-Mobile US Inc (NASDAQ:TMUS), and DISH Network Corp (NASDAQ:DISH) -- which SoftBank has long been hoping for. Also lifting S shares is news the company will partner with Pokemon Go creator Niantic Inc. The stock was last seen up 7% at $8.74, after hitting a fresh two-year high of $8.90 earlier, but options traders are busy betting on a pullback.

Digging right in, S puts are crossing at four times the typical intraday rate -- with roughly 20,000 contracts on the tape. And with around 22,000 calls traded at last check, total options volume is on pace to finish in the 98th percentile of its annual range. Leading the action by a wide margin is the weekly 12/9 8.50-strike put, where speculators appear to be purchasing new positions -- expecting the stock to slip back below $8.50 by the week's end, when the series expires.

Taking a step back, put buying has been popular in Sprint's options pits in recent weeks. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.52 sits higher than 88% of all comparable readings from the past year. Of course, given the stock's impressive technical performance this year, it's possible some shareholders have been picking up puts to protect paper profits.

Regardless, near-term options buyers are currently getting a relative bargain on S. Specifically, the stock's short-term options are pricing in unusually low volatility expectations at the moment. This is evident from the equity's 30-day at-the-money implied volatility of 50.2% and its Schaeffer's Volatility Index (SVI) of 47% -- readings that rank in the 13th and 10th percentiles of their respective 12-month ranges.

Outside of the options pits, some bears have been hitting the exits. Short interest on the security fell by nearly 10% during the most recent two-week reporting period. That said, more than 23% of the Sprint's available float is still tied up in these bearish bets, representing about six sessions' worth of trading, at the stock's typical daily volume. That means a short-squeeze situation -- which could give the shares an extra boost -- may just be getting started.

Meanwhile a round of upbeat analyst attention could also be a boon for S. At present, only two of the 19 brokerage firms tracking the stock recommend buying it. What’s more, Sprint's average 12-month price target of $5.51 sits at a 37% discount to current trading levels.

From a technical standpoint, Sprint Corp (NYSE:S) has been a standout performer, roughly quadrupling in value from its late-January record low of $2.18. The shares have been trending higher since then, with a bounce off the 100-day moving average last month helping the stock break out above resistance in the $7 region. One note of caution, though, the stock's 14-day Relative Strength Index (RSI) of 79 is parked in overbought territory, suggesting a near-term pullback may be in the cards.

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