We all know the story of how BlackBerry Ltd (NASDAQ:BBRY) fell out of the smartphone race losing against Apple Inc.’s (NASDAQ:AAPL) iPhone and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android smartphones in spite of diehard fans.
So it’s not surprising to see BBRY stock at but a tenth of its highs. There is some good news, since the stock is up 20% in the past 12 months. This is mostly as a result of a sharp 60% March rally. It has given back about one third of it already but still positive overall.
Fundamentally, it’s important to note that BlackBerry stock is not cheap, especially when you look at its 38 price-to-earnings ratio, which is well above than that of Microsoft Corporation (NASDAQ:MSFT) for example. And BBRY stock, being in rebuild mode, operates at a loss.
Sure management recently announced potential new income streams, but that’s hopium that I cannot justify buying at face value. However, I am willing to risk a little to create income from past support. The hope of new income will create enough lift to act as an inherent put in the BBRY stock price.
So for those reasons, I want to trade its price action, not its valuation. Technically there are risks. The recent loss of $9.40 leaves the stock vulnerable to fill the gap to $8 per share.
Should that happen, I bet that it would find support there, since it had served as a level of contention. Those tend to create stalls. Furthermore, Wall Street spoke loudly that $7 was too low for BBRY stock so it’s not likely to go back to it.
Click to Enlarge So I’d like to generate income from selling BlackBerry puts. But when I do that, I have to be willing and able to own the shares below current. The trick is to find support levels that will hold in case this drip lower continues.
This is different than chasing upside profits from new BBRY income streams. This way, I can profit from the prospects of them without needing them to materialize.
This is a speculative trade within a conservative portfolio. Perhaps by now analysts have tapered their expectations after the initial spike higher in March.
BBRY Stock Trade Idea
The Trade: Sell the BBRY Jan $8 put and collect 50 cents to open. This is a bullish trade that has an 85% theoretical odds of success. But if the price falls below my strike, I would lose money below $7.50.
To mitigate my risk, I can sell spreads instead.
The Alternate: Sell BBRY $7/$6 bull put spread, where I have the same chances of success but with smaller risk. If successful the spread would still yield 22%.
I’d rather have a 12% chance like the one in these trades than buy the shares and hope for a rally with no room for error.
Investing is never guaranteed, so I never risk more than 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.