Friday, December 30, 2011

Leap Wireless (LEAP) - JPM Note and AT&T / T-Mobile Fallout Re-spark Takeover Rumors

LEAP is trading $9.19, up 8.2% with IV30™ up 9.3%. The LIVEVOL® Pro Summary is below.


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Leap Wireless International, Inc. (Leap) is a wireless communications carrier that offers digital wireless services in the United States under the Cricket brand. Leap’s Cricket service offerings provide customers with unlimited wireless services for a flat rate without requiring a fixed-term contract or a credit check.

This is an order flow note -- likely the last of 2011. LEAP is moving on a story today that JPM believes LEAP (and / or Metro PCS) may be the next potential takeover candidates for T after the T-Mobile deal failings. Here's a news snippet from Bloomberg:

Leap Wireless International Inc. (LEAP) and MetroPCS Communications Inc. (PCS) may be takeover targets for bigger rivals AT&T Inc. (T) or T-Mobile USA after the larger companies’ $39 billion merger plan collapsed, JPMorgan Chase & Co. said.

The pay-as-you-go carriers could be suitable “near-term” sources of spectrum for a buyer, Phil Cusick, a JPMorgan analyst in New York, said in a note to clients today. AT&T cited a need for more spectrum as a reason for its attempt to buy T-Mobile.

Source: Bloomberg via Yahoo! Finance: Leap, MetroPCS May Be Buyout Targets for AT&T, JPMorgan Says, written by Ville Heiskanen.

I used to make a market in LEAP on NYSE ARCA back in early 2008. I believe it was a ~$50 stock back then. It's... not anymore...

The company has traded 10,835 contracts on total daily average option volume of just 1,655. Calls have traded on a 25.8:1 ratio to puts with the action in the Jan 9 calls. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls are likely mostly opening (compare OI to trade size). In fact, that OI jumped from 1,950 on 12-20-2011 to 3,640 on 12-21-2011 on what look like purchases. Today's action looks like purchases too, so I'm expecting that OI to pop to over 10,000 next Tuesday, when trading resumes.

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

The skew is actually kinda normal. There is an upside tilt to the OTM calls in Jan and somewhat in Feb -- that's a reflection of the order flow. But, I've seen LEAP skew more upside heavy as recent as Dec. 1. I actually wrote about that. You can read that post here -- Leap Wireless (LEAP) - Parabolic Risk, Calendar Vol Diff -- and see the skew chart from that date below.

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).

We can see a few things here:

1. The stock has dropped over the last six months -- it was over $16 in Jul.
2. Over the last several months (circles), the stock has been sorta stuck in a rut. Of late even more so -- the HV20 has been dipping (see the blue line going down in the vol chart).
3. The implied has dipped recently as well, except for the last few trading days. In fact, as I'm writing this note, the IV30™ has risen to over 88.5%. Still, the 52 wk range in IV30™ for LEAP is [39.57%,119.04%], so the vol can go higher... If the rumor mill really heats up in early Jan, that vol could top 100% again.

This is trade analysis, not a recommendation.

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