Sell Pricey BBRY Options for Quick Profit

by John Kmiecik | March 12, 2013 11:19 am

Research In Motion (NASDAQ:BBRY[1]) recently changed its stock symbol as it looks to change its fortune, stock and profits from sliding even further. The stock fell out of grace late in 2008 as competition got the better end of their business model. A few months back the company announced it was releasing a new phone. Here’s a trade idea based on rumors and some facts about the company that count on the old saying being true: Buy the rumor, sell the fact.

The rumor mill is in full gear after Lenovo CEO told a French paper that an acquisition of BBRY could make sense. The company also announced that the new BlackBerry device will hit U.S. stores next week, starting at just under $200. This double-barreled news shot the stock way up again and above its 50-day simple moving average and a resistance level (previous pivot levels), both around $14.

BBRYchart 300x159 Sell Pricey BBRY Options for Quick Profit
Click to Enlarge

It also increased the implied volatility of the options, making them more expensive than they were just last week. When options are overpriced — as they may be here — you should consider selling a credit spread. You take advantage of selling options that may be overpriced but still limit the risk in case the trade moves against you.

Considering the stock has broken out and has two forms of support to keep the stock from moving lower again, selling a put spread with a short amount of time to go until expiration looks like a smart play.

Sell the March 13.5/14 put credit spread (selling the March 14 put and buying the March 13.5 put) for 0.10 or better.

The maximum potential profit for this trade is $0.10 if BBRY is trading above $14 at March expiration. The maximum loss is $0.40 ($.50 – $0.10) if BBRY is trading below $13.50 at March expiration. Breakeven is $13.88 at expiration based on a $0.10 credit.

At the time of publication, Kmiecik had no positions in the securities mentioned.

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

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