FTR Lawsuit. Puts or Calls?

Yesterday, FTR received a patent on a new phone idea that would allow them to assign multiple phone numbers to one phone number. Sounds kind of confusing at first, but let me explain. Basically the idea is that you would have one phone number. You would be able to direct incoming calls to this number to multiple devices that all have their own number, such as to your cell phone, home phone, fax, computer, what have you.

Enter Google Voice. Google Voice essentially does this, but FTR got the patent. On the same day that they received the patent, Frontier sued Google. Looks to me like someone had some inside information, because the day before a complex Put Spread was ordered against FTR

Let me explain this Debit Put Spread. The way a spread works is you essentially limit your gains, but in return you reduce your upfront costs. You still have close to unlimited losses. First we will look at the two parts of the spread seperately, then we will put them together:

At the 7.50 strike 20,000 put options were bought for .22 each. As FTR drops in price, these Puts gain value. Fairly straight forward.

At the 5 strike, 20,000 puts were sold for .02 each. As FTR gains value, these expire worthless.

When you put(no pun intended) the two together, 20,000 Puts were bought for .20 each, instead of .22

Another Debit Put Spread, of the same amount and strike prices, was placed for the August expiration. These Puts are very bearish and drove the options demand way up.

Sounds like time for 2 protective put contracts? Possibly, but what about selling an in the money covered call? While a protective put will cost you money upfront, an in the money covered call will gain you liquidity up front. The risk of the covered call isbeing called to sell FTR at 7.50, which would be at a loss.

If you have been holding FTR, then you are already on record for the dividend. Dividend included, I would sell 2 calls at the 7.50 strike price in July. The price is currently .35/share, so proceeds of $70 less commission for 2 contracts. FTR needs to reach 7.85 before it will be called.

Again, we are betting bearish on FTR. If you have a few more contracts and can lower the marginal cost of commission, I'd go for the August or farther off expiration. If FTR drops very low and the call becomes fairly worthless, buy it back.