An options trading idea from Stutland Volatility Group.
Overview: Research In Motion (NASDAQ: RIMM)
RIMM designs, manufactures, and markets wireless solutions for the worldwide mobile communications market. The Canadian company is a leading maker of wireless smart phones sold under the name BlackBerry, which support the global mobile voice and email markets.
RIMM has confirmed that it will announce earnings on Thursday, June 16. Analysts covering RIMM have a consensus EPS of $1.35.
The last three months have been rough for RIMM. Its most recent earnings report was received negatively as RIMMs’ future forecast didn’t meet Street expectations. In late March the stock price tumbled to nearly $57 a share on heavy volume. And after RIMM was hit with a downgrade the company put out a negative forecast and shares moved lower by another 14%.
Things have continued along the same lines. This week Morgan Keegan cut RIMM to market perform and reduced its price target from $71 to $49. Shares are down roughly 45% from its 52-week high, closing at $37.82 on Tuesday.
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Our outlook for the information technology sector is positive and while we would like to see more clarity from RIMM for its future outlook we are expecting prices to stabilize after next week’s earnings report.
Options Strategy – RIMM Covered Call (Buy-Write)
In this situation a strategy to consider is the covered call (long the underlying, short the call options). Prices are rounded for this example and stock and option volume matched at 100 shares/1 contract for simplicity. Check the options chains for current prices.
For example, with RIMM trading at $37.90, the investor could purchase 100 shares ($37.90 x 100= $3790) and sell 1 RIMM July 42.50 Call for $0.90 (1 x 100 @ 0.90 cents = $90).
The $90 received from selling the calls lowers the investor’s breakeven in the stock to $37.00. The investor begins to lose money on his RIMM stock if it trades lower than $37.00 by July expiration (the 15th).
The maximum gain on this buy-write occurs when the stock hits $43.40 (the 42.50 strike + $0.90 = $43.40).
This strategy fits the investor who believes RIMM will not exceed $43.40 by July expiration. We expect RIMM to be range bound after the earnings announcement.
With this strategy, investors should keep in mind that if the short option becomes in-the-money you can be assigned at any time until expiration. The stock will probably be called away if it trades above $42.50. In case of assignment, the investor has to deliver the shares.
Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.
