Earnings plays are so hard to play. With that being said I do not feel comfortable playing the front month options as if it doe not work out I am screwed and I might as well go to the casino. I do however want to make a play on RIMM going into earnings. I am betting that they are going to beat the streets expectations on all fronts.
I have sold 1 Jan '11 put contract at the $60 strike for $1,050. Currently the Delta on this particular contract is $0.40, meaning for every $1 move in the stock this will move $0.40. From one of the options guys that I follow, he is saying that RIMM is pricing about a 10%. RIMM is currently trading at $64.70, so + 10% would put RIMM at about $71, if this happens I would theoretically be able to buy back the put I sold for $790 for a profit of about $260, in addition to a move of this size it should cause some mis-pricing in the option temporally allowing me to capture a little more. I really do not know what is going to happen, but this is one thing that could.
Why I like the play:
1 - Attractive valuations based on p/e ratio sited below.
2- Although competition has increased with Apple's iphone and the droid from Motorola. I think that RIMM will be okay. First because business's are heavily tied to the blackberry, they will continue to use it because it is what they have adapted to and it is the "name they know". This will continue for the same reason that business continue to use Microsoft Windows. I also think that there is a lot of room for growth internationally for RIMM. I read recently that they were in China and only had 1% of the market and 5% in other foreign markets. You add another 4% in China and that is another 60,000,000 hand sets with a population of 1.5 billion.
3 - And like most of the positions that I enter, I think that the recent sell off over the past few months creates a margin of safety to enter into a position at its current price levels.
See probabilities below:
As you can see in the above, my break-even price for RIMM is $49.55 which is a price I would not mind taking ownership off. At this price with estimates for the year at $4.15 this puts a p/e of about 11.9, and forward estimates are $4.80 which leaves this stock at a bargain with a p/e of 10.3.
I am looking for a quick trade on this play, but if I don't get it I have a back up plan of taking delivery of the stock and selling covered calls on it.
The chart:
As you can see on the chart, RIMM had a pretty sizable sell off that started on 9-24-09 which looks like it bottomed out on 11-2-2009. Since then it has been in a nice up move. Confirmation in the up move came when RIMM traded above its 50 day moving average. I would also like to see the 15 day MA cross over the 50 day to the upside soon.
Today RIMM reported earnings and blew expectations out of the water. It reported EPS of 1.10 per share on $3.92 Billion in Revenue. They were expected to report $1.04 on $3.72 Billion in Revenue.
ReplyDeleteIn the after hours RIMM surged $8 to about $71. The next thing to watch will be the guidance it gives going forward to see if it can hold on to these gains. I will look to see what I can off load my put tomorrow. Or I might even wait until next week as tomorrow is options expiration week.
Looks like you missed this one by a mile, good job meat. Obviously this is hindsight, but since you did call it exactly right, did you give any thought to buying some December or January ATM calls as well? The $65's closed at $2, those are intrinsically worth at least $6, they will most likely trade at at least $7 tomorrow. That could have been a 250% return in just a few days.
ReplyDeleteThey ended up giving higher guidance for the next qtr and fiscal year than what is expected by analyst. I would like to see it trade a bit higher off of this news.
ReplyDeleteTo answer your question, yes I did look at call in January, but I wanted a back up plan if I was wrong. I have seen how the stock has performed when they miss expectatioms or give lower guidance. With the short put it allowed me to give myself a margin of safety as well as a back up plan, while still giving me an opportunity to speculate on earnings. Maybe next time I will play it with calls, I don't know.
This morning I compared 1 $65 call contract for January 2010 expiry vs my $60 put with Jan '11 expiry to see what the profit in total dollars was with each position.
ReplyDeleteThe Jan '10 $65 strike call closed at $3.525 pre-earnings. It was tading around $6.9 during the first 15 minutes of trading. Which means for every one contract I could had made $337 per contract.
The Jan '11 $60 strike put that I own closed at $10.65 pre-earnings. I was able to buy this put back for $8.20 for a profit of $228, there was about $109 in profit difference between the above call and the put that I sold.
This makes sense to me because the Jan '10 call presented more risk. If I was wrong on the RIMM earnings then I would had most likely been out the most of the premium I paid for the Jan '11 calls. With the Put I had a back up plan as well as downside protection.
The low for the contract ths morning was $7.95, so I missed about $25 waiting to see what I could buy t back for. But all in all it served its purpose and I made some money on the earnings play.
The other thing that I do want to point out is my calculation on the calculated move and what the profit potential would had been. If you look above I metioned that the option had a delta of $0.40 and with a estimated 10% move I would be able to buy the option back for about $7.90 a contract. The low was $7.95 so it was real close. I just was not able to get that price because I decided to wait to see if it would go any higher in the first 15 minutes of trading.
ReplyDeleteAlso the Delta went from .40 to a curren delta of .28 right now.
I continue to watch RIMM for another opportunity to enter a longer term position in RIMM. I am keeping my eye on the price of the $60 put that I sold for the earnings play. It is trading at $8.60. If it gets back above $10 again I will consider initiated a longer term play as there may be upside to about $80 in this name.
ReplyDeleteSince Earnings RIMM has really not done much. It looks like it may be basing near $66. Looking at the 3 month daily chart it also looks like there is a possibility to pullback to about $64.
ReplyDeleteI am keeping this on my radar and am ready to put on a position in this name when I see some strength.