Traders don’t appear to like hip-hop mogul Jay-Z too much right now. One such trader took a bearish position on Sprint (S) yesterday by purchasing nearly 8k June 8 puts for $0.60. Earlier this week Sprint announced it purchased a 33% stake in Jay-Z’s Tidal music streaming service for roughly $200 million. Open interest in the June 8 puts totaled less than 3k contracts signifying that this is a new position.
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How do traders profit from the long put position in Sprint?
By purchasing the June 8 puts in Sprint for $0.60 traders are effectively betting that shares of Sprint will decline over 18% by June expiration. The Long put options lock in the price where investors can sell stock, allowing them to profit from a massive drop in Sprint share price with limited capital at risk.
For example purposes, if shares of Sprint are trading above $8 by June expiration (June 16), the trader who purchased the put options for $0.60 would simply lose the initial investment, which would be the maximum loss from the long put options strategy under any scenario. However in the case shares of Sprint are trading below $7.40 ($8.00 – $0.60) by June expiration, traders would generate increasing profits.
Could this just be a trader hedging a long Sprint stock position?
Some may argue that the put buying in Sprint is essentially a trader buying protection for a long stock position. Shares of Sprint are up over 40% in the last 3 months. But I contend a more appropriate strategy to protect a long Sprint stock position would be to purchase the June 9 puts.
Either way sentiment in the name is not looking good for the company following the Jay-Z / Tidal announcement, just something to keep in mind. For a list of other stocks seemingly poised for a decline in the coming weeks check out our real-time updated trading cheat sheet here.
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