RIMM’s Good Fortune Is All Tapped Out

by Joseph Hargett | September 27, 2012 9:24 am

Research in Motion (NASDAQ:RIMM[1]) had a stellar day Wednesday, as the stock rocketed more than 6% higher following a wave of positive reports.

Unfortunately, the BlackBerry maker might be out of positive news for the time being, as the company steps up to release its second-quarter earnings figures after the close this afternoon.

Recapping Wednesday’s news, the RIM announced at its annual “BlackBerry Jam” developer conference that it has seen a rise in subscribers, to 80 million from 78 million a year ago. Several brokerage houses responded with positive reviews, including upward revenue revisions from Goldman Sachs (NYSE:GS[2]). Analysts were also excited about the upcoming BlackBerry 10, which is getting positive early reviews.

But neither of these data points overshadows the fact that Research In Motion’s earnings are expected to plunge to a loss of 47 cents per share from a profit 80 cents per share in the same quarter last year. Furthermore, the company has a disappointing track record in the earnings limelight, whiffing the consensus estimate in three of the past four reporting periods for an average downside surprise of more than 161%.

And, while analysts paid lip service to RIM’s subscriber growth and upcoming smartphone release, they still are overwhelmingly bearish on the stock. Specifically, a whopping 45 of the 47 brokerage firms following RIMM rate the shares a “hold” or worse, compared to just two “buy” ratings.

Options traders also are betting heavily against RIMM. For instance, the weekly September put/call open interest ratio of 1.31 reveals that puts easily outnumber calls. With these options expiring at the end of the week, it is clear that speculative options traders are expecting a post-earnings decline from RIMM.

Contrarian traders might argue that this wealth of negativity is indicative of lowered expectations, creating the possibility that RIM could surprise investors with its second-quarter earnings report. Unfortunately, most of that potential surprise bounce was soaked up with Wednesday’s rally.

Speaking of technicals, RIMM is quite deserving of its poor reputation, as the stock has plunged more than 51% so far this year. Additionally, RIMM’s rally on Wednesday placed the shares back in contention with their declining 50-day moving average. This trendline has guided the shares steadily lower for the better part of the past two years.

Given the data above, it would appear that RIMM is destined for another retreat. What’s more, the magnitude of this drop could be quite severe, as weekly September implieds are pricing in a post-earnings move of nearly 13%. But, while weekly options are good for assessing a short-term movement, options traders looking to hold onto their stomach lining might want to consider RIMM’s October series as a less risky alternative.

One potential pre-earnings strategy for RIMM is a bear put spread; more specifically, since the stock closed at $7 on Wednesday, an October 6/7 bear put spread. This spread was last offered at 35 cents, or $35 per pair of contracts, placing breakeven at $6.65 — a 5% decline from yesterday’s close.

A maximum profit of 65 cents, or $65 per pair of contracts, is possible if RIMM closes at or below $6 when October options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

  1. RIMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIMM
  2. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS

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