Arcángel de Jesús Montoya
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Arcángel de Jesús Montoya in Money Trafficking,

Sprint's Straddles Are A Steal On Monday

Sprint Corporation (S), a holding company offering a range of wireless and wireline communications products and services that are designed to meet the needs of consumers, businesses, government subscribers and resellers, is reporting earnings on Monday, July 25, at the market opening:

(Source: TD Waterhouse)

The company beat earnings estimates in 38% of time in the last eight quarters, underperforming in 50% of time, and showed in-line results once over the time period, and has shown swift movements in the market price of the stock over the last three months:

The market participants expect the following numbers over the next few quarters, including the upcoming one:

(Source: TD Waterhouse)

Note the wide deviation of expected EPS for the next three quarters.

On the other hand, market data show that the one-month options are relatively cheap:

(Source: TD Waterhouse)

The monthly straddles (options with a strike price of $5) are worth around 14.7% of the current market price of the stock (closed on Friday at $4.62). Historically, the stock has been more volatility than that on a monthly basis over the last year:

(Source: Google Finance. Calculations by author)

As you can see, the stock has had a monthly standard deviation of 18.7% over the last 52 weeks, while the straddle expiring in a bit more than a month has an implied monthly volatility of around 15%, also including volatility from the earnings event next week. I therefore see signs of clear undervaluation in these options.

What do you think of this trade?