Research in Motion Limited RIMM has earned some interesting and enigmatic reviews over the past few days. On the bullish front, Goldman Sachs increased its fiscal year 2012 and 2013 earnings estimates for the BlackBerry parent. The brokerage believes increased sales of tablet-style devices should help sales growth. One caveat to this seemingly bullish adjustment, however, is that Goldman kept its target at $50 (representing modest downside from current levels).
On the other hand, Stifel Nicolaus downgraded its rating on RIMM to hold from buy and reduced its 12-month price target to $45 from $65. The firm expressed concern that developers are devoting less time and money to apps for the BlackBerry operating system, suggesting the battle for smartphone domination may be a losing one for RIMM.
So with Wall Street issuing a mixed opinion in the shares, what's a retail investor to do? The stock is down 13% year-to-date (easily underperforming the broader market) but has jumped nearly 25% in the past month. There are arguments for and against the stock, so investors looking to take a position in RIMM may wish to use options in to express their view.
We've detailed two potential strategies below – one moderately bullish and one bearish. These strategies are for educational purposes only and are not buy/sell/hold recommendations. All prices are as of Friday's close, when RIMM shares were at $58.66, up $1.41 on the day.
Moderately Bullish Option Strategy: Calendar Spread
Traders could take advantage of weekly options to facilitate a neutral strategy with a short-term calendar spread. By selling the November 26-dated weekly options (the 57.50 call) for $1.80 and simultaneously buying the December 26 57.50 call for $3.95, the net debit is $2.15, which is less than buying the December-dated long call alone.
The best-case scenario for the spread buyer is If RIMM hovers around the 57.50 level through next week (which is only 3-1/2 trading days long) and then continues to rally through December expiration. When the short-term option expires, gains are theoretically highest right at 57.50, as the short call expires worthless and the December call has time remaining to participate in further upside.
If the stock is trading above the strike price when the options expire, the short call will likely be assigned, creating a short stock position. The combination of this short stock and a long call is the synthetic equivalent of a long put and will have the same risk characteristics, where losses are capped at the premium paid and gains are unlimited to zero. Traders with a bullish outlook would likely buy to close the short stock and leave the long call open.
Through the December expiration cycle, the trader has the option of keeping the long call open. If the November call expires worthless, losses for the December long call are limited to the overall premium paid if RIMM is below 57.50 when the December options expire. Gains are theoretically unlimited at December expiration if the stock rallies above the breakeven price of $61.45.
The calendar-spread strategy requires diligent trade management as expiration approaches in the short-term option. It's important that the trader maintain the market exposure he desires (whether that be a naked long call, a synthetic long put, or nothing at all!). In most instances, the shorter-term call is covered and bought to close (or rolled forward) as expiration approaches.
Bearish Option Strategy: Ratio Put Spread
Investors on the bearish side of the RIMM debate could consider a ratio put spread, buying one January 60 put and simultaneously selling two January 52.50 puts. This strategy is currently priced at $1.35.
Looking ahead to expiration, the maximum profit potential for this spread is $6.15, or the difference in strike prices less the premium paid. Maximum profit occurs if RIMM is trading right at the short strike (52.50) when the options expire. The breakeven prices are $46.35 to the downside (the short strike less the maximum profit) and $58.65 to the upside (the long strike less the premium paid). The trade provides a downside hedge of about 20% down to $46.35 from its current level.
The maximum potential loss if RIMM rallies is the $1.35 premium paid (above the 60 strike). Downside risk is more significant because of the uncovered short put that is in-the-money south of 52.50. If RIMM were to decline sharply, losses would be equal to that of a long stock position.
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The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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