BlackBerry Ltd (NASDAQ:BBRY) fell out of Wall Street’s grace as the iPhone and Android smartphones dominated the market share. BBRY phones had their hardcore fans. They had the reputation of being more secure and users favored having a physical keyboard to a touchscreen. But those weren’t enough.
As a result, BBRY stock fell to but a fraction of its all-time highs, even after its recent impressive rally. The March earnings report sparked a 60% rally. Now it’s battling inside a long-term pivot point.
I am a believer in balance. And the weekly chart clearly shows that below $7 per share BlackBerry stock was too low. Now markets are trying to decide if above $11 is too high.
After a 60% rally, it is natural that stocks rest for a period of consolidation before their next leg higher. But I am not one who likes to chase performance. I’d rather bet on past proven levels. If I find support, I sell risk against it to generate income.
Part of the exuberance that caused the recent rally includes the forecast of new income streams. This remains to be proved as fruitful as markets are anticipating.
So fundamentally, it has hope of a better future. But I don’t want to risk my money on BBRY stock without any room for error. Until now, experts considered the company as a repository of intellectual properties.
So by definition, this trade is speculative. Meaning, I make sure that it is of proper size, so if things go wrong it won’t break my heart or my piggy bank. Here is an example that was an easy win late in March.
Technically, BBRY stock is vulnerable. It is setting lower highs knocking on the $10.5 floor board. If the board breaks bears could overshoot lower and retest $10 per share. While this is not a forecast, it is a possibility that I need to take into consideration. Today’s trade will have more than a 15% buffer from current price.
Click to Enlarge My thesis is that in March BBRY emphatically rejected the lower prices. Whether it’s going to rally past $12 is unclear but I am willing to own it if price falls below $9 per share.
Most analysts have very reasonable expectations of BBRY stock. They predominantly rate it as a HOLD. So the chances of surprise downgrades is minimal.
Today’s trade is not saying that I am bullish and hoping for more upside in BBRY stock. I am merely betting that the downside is limited.
And I am willing to sell risk against others’ fears of a reversion to sub $9 level. To win I only need price to stay above my position.
The Trade: Sell the BBRY Dec $9 put and collect 55 cents to open. I have an 80% theoretical chance of success if BlackBerry stock stays above the strike price through 2017. But if price falls below $9 I own the shares and would accrue losses below $8.45.
Selling naked puts carries big exposure. To limit it I can use spreads instead.
The Alternate: Sell BBRY Dec $9/$8 credit put spread where I have the same chances of success but with limited risk. Yet, if successful the spread would still yield 25%. Compare this with risking $10.85 per share to buy the shares then hope for a 25% rally from here just to match the performance of the spread.
Selling options is risky business, so I never risk more that I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
