Once king of the smartphone market, BlackBerry Ltd (NASDAQ:BBRY) could be on the verge of ditching its handset division altogether. That — and upcoming earnings — could have quite the effect on BlackBerry stock.
The company’s handset division has been hemorrhaging for a while, serving up $21 million in operating losses in the first quarter. In fact, during BlackBerry’s first-quarter conference call, CEO John Chen said that “If by September, I couldn’t find a way to get there, then I need to seriously consider being a software company only.”
Well … it’s September. And with BlackBerry slated to release its second-quarter report after the close on Wednesday, this may mark the week the company exits the mobile handset market. And BBRY shares are off this morning as the market is getting jittery.
But BlackBerry stock traders shouldn’t panic just yet.
Positive Catalysts for BlackBerry Stock
The company has made solid strides outside of the smartphone market, striking a deal for its new cargo monitoring device with Canada-based Caravan Group. Additionally, BlackBerry has launched its own software on the Google Play Store.
What’s more, Wall Street is expecting BBRY losses to decline to just 5 cents per share in the quarter, up from a loss of 13 cents per share in the same quarter last year. Still, revenue is expected to fall 19.8% to $393.75 million.
Sentiment is on the rise, however, as EarningsWhispers.com reports a whisper number of a loss of a penny per share — 4 cents better than the consensus. What’s more, there is ample room for additional improvement. Currently, Zacks reports that 12 of the 15 analysts following BBRY stock rate it a “hold” or worse. What’s more, the current 12-month price target of $7.42 per share represents a significant discount to the stock’s current perch near $7.91.
Elsewhere, a short squeeze situation could be in the works for BlackBerry stock. As of the most recent reporting period, some 57.2 million BBRY shares were sold short. As a result, nearly 11% of BlackBerry’s total float is sold short, and could provide ample fuel for a covering rally — especially if revenue comes in higher for BlackBerry handsets or if the company decides to ditch the unit altogether.
A Look at the Options Pits
Judging by options activity on BlackBerry stock, short sellers may be more than a little nervous. Currently, the September/October put/call open interest ratio arrives at an extremely bullish reading of 0.15, with calls quintupling puts among options set to expire within the next two months.
High levels of call OI might be evidence that short sellers are hedging their bets against a potential earnings-induced rally.
Click to Enlarge Overall, weekly Sept. 30 series implieds are pricing in a potential post-earnings move of about 9% for BlackBerry stock. This places the upper bound near $8.71, while the lower bound lies at $7.29. With near-term support/resistance levels lying at $8.50 and $7, an upside breakout appear to have a higher probability given implieds.
The $9 level is the next area of potential resistance for BlackBerry stock, and a short-squeeze situation could push the shares past even this hurdle, given the right earnings news.
2 Trades for BBRY
Call Spread: Negative sentiment on an outperforming stock is the typical setup for a contrarian bullish play. While BlackBerry stock isn’t performing as well as its major competitors in the handset market, shares have enjoyed plenty of upside recently. Positive news on the handset front (or a total exit) could be seen as a boon.
As such, traders looking to bet bullish on BlackBerry stock ahead of earnings may want to consider an Oct $8/$9 bull call spread. At last check, this spread was offered at 25 cents, or $25 per pair of contracts. Breakeven lies at $8.25, while a maximum profit of 75 cents, or $75 per pair of contracts, is possible if BlackBerry stock closes at or above $9 when October options expire.
Put Selling: The worst that could happen for BlackBerry stock is a flat quarterly report with no decision on the future of its handset division. Still, unless earnings miss, handset revenue continues to decline, and the company doubles down the the failing unit, BlackBerry stock should hold firm at current levels.
As such, traders with a neutral-to-bullish outlook on BlackBerry stock might want to consider a weekly Sep 30 $7 put sell. At last check, the Sep $7 put was bid at 5 cents, or $5 per contract. On the upside, you keep the premium received as long as BlackBerry stock closes above $7 when September options expire at the end of this week.
On the downside, should BBRY trade below the sold strike ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $7 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
