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Atop the unusual activity list in NASDAQ 100 (QQQQ) components, bulls were spied taking the proverbial and strong "LEAP" of faith in international telecom player Leap Wireless (LEAP). Word from the Wall Street Journal has the company hiring advisors to consider the strategic option of a sale to a larger competitor. Larger carriers AT&T (T) and Verizon (VZ) have been "sounded out" according to the report via two cans and string from Briefing.com.

Option traders were more than willing to dial in to the potential catalyst, which in part has the added fuel of shares having radically underperformed the broader market during 2009 and sporting a sympathetic pullback over the past two weeks.

The combined price action puts shares of LEAP down near existing confirmation levels of a monthly chart double bottom. That view is shown in Figure 1 below. Our friend PS Elliott doesn't entirely agree with that prognosis, but nor is it against the idea of what, on the surface, could amount to a very playable bounce for intermediate-minded strategists thinking about longer-term objectives.

Figure 1: Leap Wireless (LEAP) Monthly

"Thinking about those longer-term objectives?" The one "strategic option" I wouldn't get too aggressive with is buying options too far out in time and removed from current and what appear to be very lowly levels in the LEAP's stock price. The reason for showing this type of restraint has to do primarily with showing some respect for a potential buyout at some time down the road.

Were a deal to actually occur, options dated beyond the time when hands are shaking in front of the cameras would either go to parity and eventually lose all their time value or become worthless once the potential sale is finalized. The former could still have the trader long calls making a nice score, were the price of the deal the type with a substantial premium attached to it. However, the latter type purchase would result in a hard and fast loss.

Another problem with going out to far in time is liquidity in LEAP's options is largely inadequate. Undesirably wide bid / ask spreads appears largely tied to extremely high short interest of nearly 45% of the stock's float. The one somewhat surprising anomaly is there's not much of a skew in the puts relative to the calls, which is typical in this type situation when shares can become hard-to-borrow.


Figure 2: Leap (LEAP) March 15 / 12.5 Collar

As for Monday's operators, it appears bulls collectively took most of the described message to heart. The bulk of the abnormally heavy 22,000 contracts traded were in the February and March contracts. As well, most of that action transpired in the in-the-money 12.50 and at-the-money 15 calls.

Implieds received a strong boost from the easily apparent demand-driven activity. Premiums in February jumped 16 points from sub 70% to about 85% IV, while March saw a spike of 8 points to about 80%. The bid does represent a one month plus high for implieds, but when relating option prices to LEAP's underlying [SV] movement and range for the same period, there's not what I would consider to be a theoretical edge for premium sellers or buyers.

The observation from this corner is if I were to embrace the situation, which I haven't, I'd have to try the likes of a collar in March. Based on a potential buyer, existing option prices, the technical platform but also appreciating how most "strategic options" for traders willing to bet on such things, don't end up working out to well in the short-term at least-that makes decent enough sense to me. However, with more than a few cents involved in the spread, I wouldn't "LEAP" to get a fill at all costs either.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.

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