An Options Play to Ride RIMM’s Rise

by John Kmiecik | December 18, 2012 8:35 am

If you want to be the best, you may have to take on the best — and here’s a simple trade idea that can take advantage of the dramatic buildup in Research In Motion (NASDAQ:RIMM[1]). Some big news is on the horizon for this company, which closed on Monday at $13.93.

The trade: Sell January 10/12 put credit spread (selling the January 12 put and buying the January 10 put) for 39 cents or better.

The strategy: The maximum potential profit for this trade is 39 cents if RIMM is trading above $12 at January expiration. The maximum loss is $1.61 ($2 – 39 cents) if RIMM is trading below $10 at January expiration. Breakeven is at $11.61 at expiration, based on a 39 cent credit.

The rationale: RIMM recently announced that the unveiling of its BlackBerry 10 mobile operating system will be on Jan. 30. Many consider this to be a make-or-break event for the struggling company’s efforts to remain relevant in the booming smartphone market now dominated by Apple‘s (NASDAQ:AAPL[2]) iOS and Google‘s (NASDAQ:GOOG[3]) Android. The stock has recently been surging higher in anticipation of the event, and so has the implied volatility of the options.

What that simply means is the options have become more expensive.

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One way to take advantage of expensive options is to sell a credit spread. If possible, options traders are inclined to sell expensive options and buy inexpensive options if at all possible based on the stock’s outlook. RIMM has a nice area of support that was previous resistance right around $12.

Because the stock has been climbing higher with anticipation of BB10, it might be able to continue the surge at least until January expiration, which is before the planned launch. If the stock does falter, support should be able to keep it above the $12 area that needs to be protected.

As of this writing, John Kmiecik didn’t own any securities mentioned here.

  1. RIMM:
  2. AAPL:
  3. GOOG:

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