RIM Before Earnings – Play It Safe or Straddle It?

by Joseph Hargett | March 28, 2012 11:36 am

Research In Motion Limited (NASDAQ: RIMM[1]) is a hotbed of speculation this week, as traders position themselves ahead of the company’s fourth-quarter earnings report. The former king of the smartphone market is expected to post a 54% decline in earnings, with profit falling to 82 cents per share from $1.78 per share a year ago. Revenue is seen arriving at about $4.6 billion for the quarter.

The whisper number is set a bit higher, arriving at 84 cents per share, according to data from EarningsWhisper.com. Coincidentally, 84 cents per share is where the consensus estimate stood less than a month ago, before eight brokerage firms lowered their earnings estimates.

Historically, RIMM has been mostly steady in the earnings confessional. During the prior four reporting periods, the company has bested the consensus estimate three times. As such, it is entirely possible that the company will top fourth-quarter earnings estimates; it beat Wall Street’s third-quarter target by eight cents per share in December.

But, as RIMM regulars know, the company regularly takes a hit due to its poor guidance. Looking ahead to the first quarter, analysts see revenue falling 13% from $4.91 billion to $4.27 billion, while earnings are expected to drop by 50%, from $1.33 per share to 67 cents per share.

As you might suspect, RIMM has attracted a flood of bears ahead of tomorrow’s trip to the earnings confessional. For instance, 48 of the 50 analysts following the shares rate them a “hold” or worse, versus just two “buy” ratings. Meanwhile, short interest totals about 60.3 million shares, or roughly 13% of RIMM’s total float.

Options traders are also firmly bearish when it comes to RIMM’s post-earnings prospects. In the April options series, put open interest totals 213,357 contracts, versus call open interest of 176,173 contracts. What’s more, this negativity is reflected across the front-three months of RIMM options, with the put/call open interest ratio for this period arriving at 1.04, according to data from Schaeffer’s Investment Research.

That said, it appears that calls are gaining popularity among the truly speculative options traders. Specifically, in the March weekly options series (which expires on March 30), call open interest totals 32,295 contracts, versus put open interest of 23,307 contracts. The most popular weekly call is the out-of-the-money March 15 strike, where 12,279 contracts reside. Another 8,817 calls are open at the March 14 strike, while 6,270 contracts reside at the overhead March 16 weekly call.

Technically speaking, RIMM offers very little for these speculative bulls. The stock has been in freefall since March 2011, plunging more than 80% during this time frame. What’s more, the shares are staring up at growing resistance at the 15 level – an area that is currently home to RIMM’s declining 50-day moving average. Support, meanwhile, rests near the security’s annual low of $12.50, and at the round-number $10 level below that.

Daily chart of Research in Motion (RIMM)
Click to Enlarge

Options traders looking to “play it safe” ahead of RIMM’s quarterly report might want to consider buying an April 14 put (and possibly legging into a spread by selling the April 12 put). At last check, the April 14 put was asked at $1.34, or $134 per contract, with breakeven arriving at $12.66. With the April 12 put last bid at 48 cents, or $48 per contract, the total debit for the April 12/14 bear put spread arrives at 86 cents per share. Breakeven for the spread arrives at $13.14, with the position banking a maximum profit of $1.14, or $114 per pair of contracts, if RIMM closes at or below $12 when April options expire.

However, if you are feeling a bit more adventurous, you could dive into a RIMM April 14 straddle. With expectations extremely low ahead of the report, there is a good chance that RIMM could surprise bearish investors and analysts. On the other hand, it is also possible that the situation at RIMM is worse than the company is letting on. In either case, there is the potential for a sharp post earnings move – a perfect situation for entering a straddle.

At last check, an April 14 RIMM straddle was asked at $2.31, or $231 per pair of contracts. There are two breakevens on this trade: $16.31 on the upside, and $11.69 on the downside.

As of this writing, Joseph Hargett does not own any shares mentioned here. 

  1. RIMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIMM

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