Trade of the Day: Blackberry (BBRY)

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Despite the stock market’s record run from the start of 2013, shares of BlackBerry Ltd (NASDAQ:BBRY) are down 45% since peaking at a high of $18.32 two years ago. It remains to be seen if the market will continue its recent swoon or hold the bottom of the trading ranges, but this year and last have provided ripe opportunities to pick some low-hanging fruit via stocks like BBRY.

Shares gained 50% last year and have spiked on takeover rumors in recent weeks. There is a good chance they could trade to $13–$14 before a major player does make an official takeover bid this year.

A 45%–50% “premium” with shares pushing $13–$14 would have a takeover value of $20. The company has beaten Wall Street’s expectations for the past four quarters, but the last quarter produced a profit of a penny a share. This was a major turning point following three previous quarters of losses.

BlackBerry’s next earnings release is scheduled for late March, and Wall Street is expecting a loss of $0.04 a share. However, there is a wide range for the company to impress or disappoint Wall Street’s expectations.

The low estimate is calling for BlackBerry to lose up to 15 cents a share, while the high estimate has profits reaching 10 cents a share. This is a 25-point price swing — and the final number will be headline material.

This event is nearly two months away and will depend on how well the company’s latest, or Classic, BlackBerry smartphone is received. Sales are looking good, as demand was high and the BlackBerry Classic sold-out temporarily in December for North America.

Wall Street would like to see Classic sales north of 300,000 but are realistically thinking 200,000. I believe that sales could reach 500,000 to 1 million units as more smartphones users start to look for “security.” This would obviously be a blowout number.

Trade of the Day: BlackBerry Ltd (NASDAQ:BBRY)

If BBRY shares can hold $10–$9.75, there are several ways to play a possible move into the mid-teens. Given the current market volatility, this trade makes sense, as a serious takeover bid could emerge if shares drop into the single-digits again.

BlackBerry recently “denied” rumors of a Samsung takeover bid, and most companies often “hold out” for higher prices or to attract other bidders.

To play the move higher on improving fundamentals, takeover chatter, and a run to the mid-teens, I like the BlackBerry April $13 call options (BBRY150417C00013000) and the June $13 call options (BBRY150619C00013000). The April options have 74 days before they expire, while the June calls have over four months (or 137 days) until expiration.

The math is the most important when running numbers on an option trade, and both of these options provide a nice risk/ reward setup.

The April $13 calls are trading at 40 cents and would be worth at least $1 if shares traded to or past $14 by mid-April. This would represent a return of 150% from current levels. One contract of the aforementioned call options would cost $40 and would be worth $100 if this scenario plays out.

As for the June $13 calls, they are trading at 60 cents and would be worth at least $1.20 if shares traded to or past $14.20 by mid-June. This would represent a return of 100% from current levels. One contract of the aforementioned call options would cost $60 and would be worth $120 if this scenario plays out.

The June calls would allow more time for the trade to play out, and both options could be purchased for $1, together. If shares trade to $14 by mid-April, both options will be worth at least $1 each, or $2, together. This would represent a 100% return.

The biggest risk is if the company misses on sales estimates and/or takes another loss for the current quarter, and no marriage comes. If so, shareholders and option traders could be left alone at the altar after falling in love with BlackBerry.

If shares stay below $13 through April 17, the BBRY April $13 calls will expire worthless. The break-even point for this “half” of the trade would be $13.40. However, the June calls would still be open.

If shares of BlackBerry are still trading below $13 by mid-June, the June $13 calls would expire worthless as well. The break-even point for the trade would be at $14, as the cost of the April loss would still need to be covered. To get a 100% return from buying both aforementioned call options, shares of BlackBerry would need to reach $15 by mid-June, if the April calls expire worthless.

You can vary your risk by purchasing between $40–$100 for an option contract(s). Most professional traders like to roll with round lots when buying options. This means a 10-contract trade could cost anywhere from $400-$1,000.

As you can see, you can take the same trade as the suit and ties with a lot less money than buying the stock by using options. At current levels, to buy 100 shares of BlackBerry would cost you about $1,000. To get a 100% return from the stock, shares would need to trigger $20. Possible — but that’s a much higher price target, and one that would likely require a takeover offer.

While options always get a bad rap for being “risky,” the options look much better than buying stock as a way to play BlackBerry over the next three to six months.

Also, for those of you following my previous trade in JDS Uniphase Corporate (NASDAQ:JDSU), shares got whacked following a disappointing earnings announcement and lowered guidance. The close below the 200-day moving average and $12.50 will now serve as resistance. Additional support is at $11.75–$11.50 on a drop below $12. I would likely close the trade if $11.50 fails to hold.

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