Unusual Volume in T-Mobile US Call Options Highlights Investor Interest

T-Mobile US (TMUS) stock has a large, unusual volume of out-of-the-money (OTM) call options trading today. The volume is over 85 times the prior number of contracts outstanding. This could be due to a large number of covered call option sellers.

TMUS stock is at $261.90 today, up over 1% in a down market. TMUS has done well over the last 3 months, up over +18.6% since the end of last year when it closed at $220.73. 

That makes TMUS one of the few stocks with positive performance returns year-to-date (YTD).

The call option activity can be seen in the Barchart Unusual Stock Options Report Activity Report, as shown in the table below. It shows that a large tranche of over 9,700 call option contracts have traded at the $270.00 strike price for expiration this Friday, March 28.

OTM Covered Call Plays

Those call options are out-of-the-money (OTM) since today's trading price is lower than the strike price.

As a result, today's call options volume could be due to covered call sellers. For example, at the midprice of 21 cents, a covered call seller makes a 2-day yield of 0.08%:

    $0.21/$262.83 = 0.000798 = 0.08%

That may not seem like much. But on an annualized basis, assuming it can be repeated every 2 days, the expected return (ER) is 14.18%:

   365/2 x 0.000798 = 177.5 x 0.008 = 0.1418 = 14.18%

However, on a more practical basis, assuming that this is done once a week for a year (i.e., 52 times), two days before weekly expiration, the ER is lower:

  52 x 0.000798 = 0.041496 = 4.15% annual ER

That means it is a viable alternative to holding cash for two days every week. Moreover, even if the stock rises to this strike price, the investors will make a good capital gain:

  $270/$262.83 = 1.0273 = +2.73%

In that case, the total return is 0.08% income +2.73% capital gain, or +2.81% for the two-day period. If that return can be repeated every week for a year, the expected return is very high:

  52 x 0.0281 = 1.4612 = +146% annual ER

Call Buyers Enthusiasm

Nevertheless, the call option buyers could be highly bullish on TMUS stock as well. The breakeven price is $270.23, using the ask side premium. That is 2.82% higher than today's price.

In other words, the call option buyers may believe that TMUS will rise 2.9% or higher in the next two days.

After all, TMUS stock has been on an upswing. Keep in mind that this is a highly speculative purchase. Investors who decide to copy this trade should be aware of the risks.

Investors can study these risks by reviewing the Barchart Options Education pages, under the “Learn” tab, such as the Long Call Options, the Options Learning Center, and the Selling vs. Buying tabs.

The bottom line is that an investor who buys a call option like this one, with just 2 days left to the expiry period, is making a highly speculative purchase.