Option Strategies in Research in Motion (RIMM)
Friday morning, JP Morgan upgraded Research in Motion Limited (NASDAQ: RIMM) to “overweight” (basically a buy) from “neutral” (basically a hold). Analysts expressed bullishness toward the smartphone sector, saying 2010 “will be the first year for true mass-market adoption of mobile computers.” This trend could bode well for RIMM, parent of the BlackBerry device. The banking giant also adjusted its 12-month price target on RIMM by 20% to $84 from $70. The stock closed at $75.06 on Friday (after a 2.2% advance on the day). RIMM will report earnings on Wednesday after the close, and analysts estimate per-share results of $1.28.
While analysts are basically limited to three schools of thought – “buy,” “sell,” or “hold,” option traders can build a variety of strategies based on how bullish, bearish, or neutral they are. There are dozens of option strategies, all with their own risk/reward profiles that can be used by investors who expect varying degrees of changes in price action or volatility.
Below are two ways stock traders might trade RIMM options instead of (or in addition to) buying or selling the stock outright. These are not buy-sell-hold recommendations, just a demonstration of potential strategies. One is for RIMM bulls who side with JP Morgan, and the other is for bears who believe RIMM’s upside is limited.
*Option prices given as of Monday morning
Bullish Option Strategy: Bull Put Spread
Investors who think RIMM will stay afloat for the foreseeable future could consider selling a bull put spread. The September 75/70 put spread can be sold to open for around $2.10 (by selling the September 75 put and buying the further-out-of-the-money September 70 put). If RIMM is trading above $75 when these options expire on Sept. 17, the trader will keep the $2.10 premium collected as profit. This is the maximum potential profit, and maximum loss (which would occur if RIMM falls below $70) is capped at $2.90.
Breakeven for this strategy is $72.90. Anywhere above this level (at expiration), the put spread seller retains at least part of the credit collected as profit. Because RIMM doesn’t have to move higher for this spread to hit its maximum profit potential (it only has to stay still), this spread is considered a moderately bullish (to neutral) play.
Bearish Option Strategy: Long Put
Investors who disagree with JP Morgan’s optimistic outlook (or who think RIMM could react negatively to this week’s earnings announcement) might look into buying shorter-term puts — the near-the-money June 75 put is currently asked at $4.85. Put buyers can potentially lose 100% of the premium paid but can profit substantially if the underlying stock declines below the breakeven point. Breakeven at expiration is $70.15, or a 6.5% drop from current levels. The put buyer doesn’t need to hold these positions all the way through expiration; a decline in price or implied volatility might provide a reasonable exit point.
Your Take?
Do you agree with JP Morgan, or are you feeling more bearish about RIMM’s future performance? Feel free to add your opinion in the comments below.
If you are new to options and still trying to get your feet wet, it’s helpful to start by trying your trades in a virtual trading account.
Photo Credit: VancityAllie
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