MetroPCS Communications (PCS) - Elevated Near-term Tail Risk on Takeover Possibility

MetroPCS Communications, Inc. (MetroPCS Communications) is a wireless telecommunications provider in the United States measured by the number of subscribers served.

PCS and Leap Wireless (LEAP) have been thrust back into the takeover mill after the AT&T / T-Mobile deal fell apart. Here’s a quick snippet from an article I’ve referenced before.

Leap Wireless International Inc. (LEAP) and MetroPCS Communications Inc. (PCS) may be takeover targets for bigger rivals AT&T Inc. (T) or T-Mobile USA after the larger companies’ $39 billion merger plan collapsed, JPMorgan Chase & Co. said.

The pay-as-you-go carriers could be suitable “near-term” sources of spectrum for a buyer, Phil Cusick, a JPMorgan analyst in New York, said in a note to clients today. AT&T cited a need for more spectrum as a reason for its attempt to buy T-Mobile.

Source: Bloomberg via Yahoo! Finance: Leap, MetroPCS May Be Buyout Targets for AT&T, JPMorgan Says, written by Ville Heiskanen.



There’s actually a lot going on here. Here’s what I see:

1. Starting simple (and rather obvious), the month-to-month vols show a monotonic increase from the back to the front, reflecting elevated risk in the near-term relative to the mid/long – term..

It’s worth noting that the next PCS earnings report should be after Feb expo. So the May options have a vol event that the Jan and Feb options do not have, yet the May vol is depressed to those front months.

2. The Jan expiry shows a parabolic skew – the upside and downside OTM options are priced to higher vol than the ATM. The option market reflects elevated tail risk in the near-term.

3. The “normal” shaped skew in May, with the OTM calls priced to lower vol than the ATM options, has created a large vol diff between the Feb and May upside skew.

Let’s next turn to the Charts Tab, below (6 months). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



A couple of things here that caught my eye.

1. Earnings have been a substantial event with respect to moving stock. Check out that move on 8-2-2011. PCS went from $16.18 to $10.26 in a day off of earnings and a few days later closed at $8.92. The 11-1-2011 report didn’t affect as much of a move, but still saw the stock lower by ~17% from a few days before to the day after. In English, yeah, earnings matter.

2. While the Jan vol is elevated to the back months, and Feb is elevated to May, the overall IV30™ -- which is a weighted average of the front two months – is still kinda “fair” value, as it lies in between the HV20 and HV180. Specifically:

IV30™: 72.08%
HV20: 61.73%
HV180: 75.92%

Finally, let’s turn to the Options Tab.



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. I will say that we can see the monthly vols are priced 81%, 68% and 58% for Jan, Feb and May, respectively (top of the Options Tab). The 52 wk range in stock price for PCS is [$7.51, $18.79].

The question is whether or not PCS has a sort of "downside protection" for the near-term as the takeover possibility lingers. It's also interesting to consider whether or not the stock drops on takeover news of LEAP or if it rises on spec that it becomes an even more likely takeover candidate for the remaining field of large wireless providers. There's also that earnings vol in May -- or lack thereof. All worth examining, IMHO.

This is trade analysis, not a recommendation.