Risk Reversal: Leap Wireless (LEAP)

Leap Wireless International (LEAP) is a wireless communications carrier that offers digital wireless service in the United States under the Cricket brand.  Cricket service is offered in 30 states and had approximately 3.8 million customers.  


Leap has been a target of constant rumors for potential acquisition by MetroPCS, Verizon and AT&T.  Back in 2007, MetroPCS actually made a $5.5 billion bid, but Leap rebuffed the offer.  Well, that turned out to be the worst decision by Leap's management as the company's market cap has shrunk to $1.1 billion 

Fundamentally, the revenue growth is there.  The company generated $1.6 billion revenue in 2007, $1.9 billion in 2008 and after 4Q09 results, total FY09 revenue could easily top $2.2 billion.  However, the primary issue is very high debt ($2.7 billion) and high required annual capital expenditures to fuel future expansion plans.  In last 3 years, the company always had negative free cash flow and it has never turned a dime in profit.  


Technically, the stock is a disaster and has lost nearly 70% value since peaking in May 2009.  There is no way to paint to a pretty picture and I won't even try.  However, the company announced yesterday that it has officially hired Goldman Sachs and Morgan Stanley to advise on potential sale of the company to larger rivals.  


I think this change in company's stance to put itself up for sale is shareholder friendly and should provide a floor underneath the stock.  I think $12 will hold as support and I like the following risk reversal trade:


- Buy to open July $10 strike puts
- Sell to open July $12.50 strike puts, for a net credit of $0.85


- Buy to open July $20 strike calls for a net debit of $0.85


Notice, I am using the credit received from selling the bull put vertical to buy upside calls for even money.  This creates a no loss/no gain position if the stock stays anywhere between $12.50 and $20 on July expiration.  More conservative traders could simply just do the vertical without buying upside calls.  That's perfectly fine, but your gains will be limited and you won't be able to participate if there is a takeout above $20.  


I like the odds here and I would use a break below $12 to stop out of the position.  


Good luck!