Sprint Nextel Corp. (NYSE: S) shares are flat this morning even as most other stocks are falling. The Wall Street Journal reported yesterday afternoon that the company plans to lay off several thousand employees in a move designed to boost profit margins so that it can better compete with rivals AT&T (NYSE: T) and Verizon (NYSE: VZ). S cut its payroll by about 5,000 jobs last year. Analysts are saying that although cutting costs will help the company, the most pressing issue for S will be finding a way to stop its customers from defecting to its two big rivals. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on S.After hitting a one-year high of $23.42 in June, the stock hit a one-year low of $12.10 last week. S opened this morning at $12.23. So far today the stock has hit a low of $12.20 and a high of $12.47. As of 10:30, S is trading at $12.35, down 1 cent (-0.1%). The chart for S looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $10 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in just four months as long as S is above $10 at May expiration. Sprint would have to fall by more than 18% before we would start to lose money.
S hasn't been below $12 at all in the past year and has shown support around $12 recently. This trade could be risky if the economy does not start to recover int he next few months, but even if that happens, this position could be protected by possible bargain hunters who see a blue-chip stock that is much cheaper now than it was a year ago.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in S or VZ. He does control long hedged positions in T.
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