Handset manufacturer and network operator Research in Motion (NASDAQ:RIMM) has gotten a lot of attention over the last few weeks, as the stock has shot higher from $8.50 to its current price at $11.54, a lofty gain of 35% against the S&P 500’s return of around 4%. The sudden activity is the result of speculation surrounding the upcoming release of the newest iteration of the “crackberry” as RIMM tries to up the ante in the competitive wireless sector…again.
While the stock has shot higher, the rise is a temporary diversion from the long-term trend and likely an opportunity for nimble traders to take advantage of an opportunity to add a short position to their portfolios. One reason for this outlook is the short interest activity on the stock.
As of the last release of short interest data, RIMM’s short interest ratio had reached a reading just above 7.0, one of its highest in the last year. Typically, we look for a high short interest ratio as a catalyst for a bullish trade, but one thing is missing in this case. Contrarian indicators like the short interest ratio only work when they are counter to a stock’s trend. In this case, the high short interest is a natural result of the fact that RIMM is down more than 20% for 2012, including the recent rally of almost 40%! Most likely, the recent rally is the result of the short sellers closing their positions out at a profit, not a loss which is normally the case with a bullish short squeeze. So what now?
Click to Enlarge From a technical perspective, RIMM shares have a few technical obstacles overhead, which should put some pressure on the stock over the short-term. First, round-numbered resistance at $12. Typically, investors like to look at round numbers as a make-or-break line in the sand. We would expect to see traders that bought the stock at $8.50 take profits If RIMM breaks the $12 level for more than a day or two. Second, for the techno-nerds like us, $12 represents the 50% retracement level from the 2012 highs ($18) and lows ($6). These Fibonacci levels are often reliable indications of technical resistance.
Options traders have been piling into the December 10 and 11 calls on RIMM, suggesting that there is a growing crowd of bullish sentiment out there, something that typically works against a company’s stock. Let’s be honest, we’ve already pointed out that this stock is down more than 20%, after you factor in the recent 40%, there aren’t many investors that are willing to step into the market and bet that RIMM is ready to do battle with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), which means that RIMM is likely to run into a vacuum of buying, putting it at risk of succumbing selling pressure.
The recent run in RIMM has opened up an opportunity for traders looking to take a short-term trade on a stock with some downside potential.
Recommendation: At this point, we would short the stock at its current price.
Options Alternative: Short-term put options would benefit from a short decline in share prices as the RIMM bulls take a break from running this stock through the roof. Options traders should consider buying to open the RIMM December 11 Put as an opportunity to leverage the expected regression in RIMM prices back to their mean. This option is currently selling for under $0.70 per contract and would likely double on a move below $11 within the next week or two.