by Joseph Hargett | June 27, 2013 9:30 am
Now barely better than a pauper in the market after failing to keep pace with Apple (AAPL) and Google (GOOG) Android-powered products, former smartphone king BlackBerry (BBRY) faces a mountain of pessimism as it prepares to release its fiscal first-quarter earnings report Friday morning.
For the record, Wall Street is looking for a profit of 11 cents per share from BBRY, with revenue expected to rise 35% year-over-year to $3.4 billion. Outside of BlackBerry’s bottom-line figures, Wall Street’ will be looking for gross margins of 32.9%, according to consensus estimates, as well as strong global BlackBerry unit sales. Specifically, the consensus expects that BBRY shipped 7.3 million smartphones during the quarter, with BlackBerry 10 sales accounting for roughly 3.5 million units.
Fundamentally, the company has seen improvements, with BlackBerry topping Wall Street’s expectations in three of the past four reporting periods. Still, judging from the stock’s sentiment backdrop, BBRY bulls are few and far between.
Analysts have doled out just seven “buy” ratings, compared to seven “holds” and a hefty 14 outright “sell” ratings. Furthermore, Thomson Reuters reports that the average 12-month price target for BBRY rests at about $12.70 — a discount to Wednesday’s close at $14.91.
Meanwhile, short sellers have had a field day with BlackBerry, pushing the stock’s short interest to an all-time high. More than 182 million BBRY shares are sold short, representing nearly 38% of the stock’s total float. From a contrarian perspective, this massive short position could provide fuel for an explosive short-squeeze rally if BBRY performs better than expected tomorrow morning.
Turning to options activity, BlackBerry has attracted a flood of short-term call open interest in recent weeks. The stock sports no less than three weekly option varieties, with the weekly June 28 series currently the frontrunner. The soon-to-expire weekly June series sports total put open interest of 35,221 contracts vs. 60,193 call contracts, resulting in a put/call open interest ratio of 0.58 — a reading with a slight bullish bias.
The tables turn dramatically when we shift our focus to the July 6 series, where 11,801 put contracts and 32,967 call contracts reside. The put/call open interest ratio for this series comes in at a considerably bullish 0.36, with calls nearly tripling puts. It would seem that options traders are expecting a more muted immediate rally for BBRY, with a stronger upside move during the holiday-shortened week of July 6.
Outside the realm of weekly options, activity looks a bit more level-headed. In the front two months of BBRY options (including the June and August series), there are 258,000 calls open compared to roughly 184,000 put contracts. The resulting put/call open interest ratio here comes in at 0.71, hinting at historically normal pre-earnings expectations.
There is one thing to keep in mind when looking at BBRY options: The overall call activity could be less an indication of expected direction and more of a hedge for short sellers.
Short sellers typically buy call options ahead of events such as earnings as a hedge against sharp upside moves. This locks in a better exit price for their short position, allowing them to limit losses and avoid chasing a soaring stock. This tidbit is very important if you are using BBRY options data to gauge investor sentiment or expectations (e.g. calls equal bullish sentiment and puts equal bearish sentiment).
Click to Enlarge Moving on to BBRY’s technical backdrop, the stock currently is rebounding from support in the $13.50 region, allowing the shares to reclaim their 10-, 20- and 50-day moving averages. The move back above the 50-day was key for BBRY, as this trendline was instrumental in forcing the shares lower throughout May. As for levels to watch, $15 and $16.50 could be short-term sticking points, while support lies at $14 and $13.50.
Those looking to jump into an options trade ahead of RIM’s quarterly report will want to know that weekly June option implieds are pricing in a post-earnings move of nearly 11%. This places the upper bound at near $16.62, while the lower bound lies near $13.38.
Given the extremely low earnings expectations, the prospect of strong BlackBerry 10 sales, and the stock’s current technical backdrop, I’m inclined to look toward a bullish position ahead of tomorrow’s report.
Taking implieds into account, a (monthly) July 15/16.50 bull call spread stands a good chance of realizing a profit.
At the close of trading last night, this spread was offered at 50 cents, or $50 per pair of contracts. Breakeven lies at $15.50, while a maximum profit of $1 — or $100 per pair of contracts — is possible if BBRY closes at or above $16.50 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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