Service interruptions. Fierce competition from Android and iPhone. A recession. General ennui. These factors and others have made business difficult for Research In Motion (NYSE:RIMM). In the past year, RIMM shares have given back 74% of their value, with the stock dropping 40% in the last six months alone. Technical analysts (a/k/a “chartists”) might recognize that RIMM has been foundering below its 10-week and 20-week moving averages for the past year or so.
Some options activity observed Thursday afternoon suggests the speculative crowd thinks the downside could continue for the beleaguered mobile phone maker. Around 1 p.m. ET, two large blocks that together consisted of 22,600 option contracts traded at the April 16-strike put.
One block of 15,600 contracts traded for $2.08 per contract around 1:15, while a block of 7,000 contracts crossed the tape at $2.15 roughly a half-hour later. The blocks, respectively, were therefore worth more than $3.2 million and $1.5 million! (Options have a factor of 100 as each contract represents 100 shares of the underlying stock. Therefore a contract price of $2.15 actually translates to $215).
There are a couple of ways we can surmise these puts were being purchased rather than sold. First, the prices were closer to the ask price at the time they traded, which is a sign they executed on the buy side. Secondly, we saw the price of the put increase after the first block changed hands, suggesting an increase in buying demand.
Throughout the day, nearly 35,000 puts traded at this strike price, compared to existing open interest of 10,912 options. Friday morning, the open interest figure read 42,167, suggesting that the lion’s share of Thursday’s volume did, in fact, translate as new open interest.
So far, this trade is moving in the wrong direction, as RIMM shares opened higher in Friday’s trading. In order for the put to be profitable at April options expiration, the shares would need to drop below $13.85, or the 16 strike price less the $2.15 premium paid for the options.
That’s a pretty hefty drop of almost 17% between now and April 20. Potential profits are theoretically unlimited down to the zero mark below this point. The most the trader can lose, on the other hand, is 100% of the amount paid to buy the put.
It’s possible these put buyers are hoping RIMM will have a disappointing outcome in the earnings confessional. RIMM will next report earnings on March 29, about three weeks before these put options expire. Analysts are currently expecting the company to show per-share earnings of 83 cents per share, a 53% drop from year-ago results of $1.78 per share.
If RIMM comes in below this estimate or announces other lackluster news (falling revenue, reduced subscriber growth), a sell-off could ensue, making all RIMM put buyers very satisfied indeed.