Monday, March 21, 2011

Sprint Nextel (S) - AT&T Buys T-Mobile; Who Buys Sprint?

S is trading $4.24, down 16.1% with IV30™ up 6.7%. The LIVEVOL® Pro Summary is below.


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The industry news is this:
AT&T Inc. announced an agreement to purchase T-Mobile USA from Deutsche Telekom AG for $39 billion in a deal that would create the largest cell phone company in the United States.
Source: EFE News Service (in Livevol® Pro).

The company has traded nearly 130,000 contracts in the first two and a half hours on total daily average option volume of just 36,400. Calls have traded on a 2:1 ratio to puts with the largest trade of the day being a purchase of 30,000 May 5.5 calls. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. The May 5.5 calls look to be opening (compare OI to volume). The Apr 4.5 calls are also active with nearly 14,000 changing hands. The existing OI in those call is 44,567 -- I believe that to be long interest and the trades today also look mostly long.

The Skew Tab snap (below) illustrates the vols by strike by month.

The skew is parabolic -- indicating elevated risk to both the upside and downsides. Hmm...

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Two notable things:
1. The stock drop today.
2. The elevated vol.

So speculators/investors are buying the vol in this company even though it's elevated.

Possible Trades to Analyze
This one has a few ways it can go. Rather than discuss trades to examine, let's look at what might actually happen to the company itself:

1. It gets bought out at some premium that would be lower than it would have been if this deal didn't happen. Read: S becomes a bit more desperate.

2. It gets bought out for more than it would have been if this deal didn't happen if a larger company (say, Verizon) becomes more desperate to swoop up the shrinking field of smaller cell providers. Throw in the possibility of competitive bids with two or more suitors...

3 The company sits here with uncertainty high -- making the elevated vol a sale.

4. The rumor mill gets going -- the stock can pop on takeover rumors and/or drop on rumors that other suitors aren't interested. Similarly, if S releases the "we are actively seeking a strategic sale" and hires a big firm to lead the search (like Goldy, MS or CS) -- that could pop the stock.

5. The most likely: Something unexpected.

This is trade analysis, not a recommendation.

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