Earn A 7.8% Return On This Telecom Giant

M&A, Options, Technology Trends

With all the talk about interest rates, trade wars, and earnings, it may have been easy to miss some essential merger news. A massive industry with only four major players in it is about to go down to just three companies.

Of course, I’m talking about the wireless telecom industry and the proposed merger between Sprint (S) and T-Mobile (TMUS). The combined entity will end up being on par with Verizon (VZ) and AT&T (T) in terms of market share. The government just recently approved the merger, which had been quashed before by a previous administration.

For Sprint, this deal is likely the only way to save the former telecom powerhouse, which has been struggling essentially since the ill-advised Nextel merger. The $35 billion merger in 2005 is often considered as one of the worst ever.

For T-Mobile, it gives the company a chance to compete with the two most prominent players by increasing their bandwidth and getting access to Sprint’s 5G network. The Sprint/T-Mobile entity will likely be the leader in the 5G space.

Both TMUS and S saw a robust amount of bullish investor activity when the news broke. Shares in both companies were up about 7%. In the meantime, the reaction of VZ and T share prices have been mostly positive. In a nutshell, less competition in the space could very much lead to higher prices for customers – but that’s a good thing from the perspective of the telecom shareholder.

If customers end up having to pay more money because there are fewer choices, the three big (remaining) wireless players all stand to earn more profits. The fact that this may be the case is the reason why the merger was subject to anti-trust review in the first place.

Of course, we don’t know for sure what will happen with prices down the line. Part of the merger agreement is that Dish Network (DISH) would buy some of Sprint and T-Mobile’s assets and build out their 5G network. However, that would take several years to complete.

Getting back to the existing players, options activity in VZ has been moderately bullish in recent days, at in terms of the remainder of the summer. In particular, a large covered call traded in VZ which sacrifices some yield in order to create room for the stock to run higher.

The covered call traders sold 5,000 of the VZ September 20th 60 calls for $0.37 versus 500,000 shares at $56.61. This means the max gain is at $60 or higher in the share price by September expiration. It results in a total potential return of 7.8% in just about 50 days.

The $0.37 collected from the calls provides less than 1% yield but annualized it would amount to 5%. That effectively doubles the dividend yield on the stock, which is 4.25%. In dollar terms, the trade collected $185,000 in premiums.

This is the type of trade I recommend if you are bullish on VZ but would like to earn at least a small yield while you wait. Remember, though; this is more of a stock appreciation trade than a yield trade.

Still, being able to earn 7.8% max gain in 50 days is a solid result for a low-risk trade. You’ll also get the $0.37 from the calls and the $0.60 standard dividend payout regardless of what happens to the share price.

Read This If You've Ever Lost Money Trading Options

Does everything seem to go wrong right after you place an options trade?

You watch the stock and everything is going right.

Then you open the trade... and within an hour, you've lost money.

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If you knew how they worked, already you could've booked gains of:

  • March 3rd VXZ call = 367%
  • March 4th XLY put spread = 170%
  • February 18th WMT put spread = 178%
  • January 14th DISH call = 109%
  • February 11th ETFC call = 1,421%
  • January 28th FAST put = 233%
  • January 21st GLD call butterfly = 156%
  • January 30th XLB put butterfly = 222%
  • January 2nd ARNC call spread = 70%
Just like I did.

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