Trade Update Dec 20th, 2012: With RIMM up 16% in the 2 weeks since I initiated the Dec weekly 11.50 / Dec regular 12 Put Calendar*, my trade has lost two thirds of its value. The implied move (~12%) in the options market is below what I would need to on the downside to break-even, so holding these puts into the print is a very low probability trade. Not only do I have to get the direction right, but I need to get an out-sized move. As I said below when I initiated the position, it was with medium conviction and I did in small size and given the way the stock was moving it was ill-conceived in hindsight. I am going to cut my losses and move on.
Action: RIMM ($13.90) Sold to Close Dec 12 Puts at .19 for a .40 loss.
* Last Friday the Dec 14th weekly 11.50 puts that I was short expired worthless.
Original Post Dec 6th, 2012: New Trade $RIMM : Can Heins get the Turnaround Job Done?
Event: RIMM reports fiscal Q3 earnings on Dec 20th after the close. The options market is implying about a 10% move which is basically inline with the 4 qtr avg move of about 10.5%.
Volatility: December 22nd regular expiration options are already in the high 80’s, reflecting the uncertainty going into earnings, as well as the dollar cheapness of options on an 11 or 12 dollar stock. The Dec14th weeklies are slightly less, at or around 70 vol, they’ve basically been dragged higher by the next week’s options, even though little news is expected in the week before the report. Here’s a look at how those high 80’s options look historically:[caption id="attachment_20231" align="aligncenter" width="580" caption="IV vs HV from LiveVol Pro"][/caption]
My View: RIMM has almost doubled off of the Sept lows for a whole host of reasons, none of which has much do with their fundamentals. There was a handful of analyst upgrades, as sentiment had gotten overly negative given some fairly simple sum of the parts valuation analysis. With the stocks rise from the dead there have been daily rumors of take overs and even some enthusiasm surrounding the company’s much delayed launch of their new operating system in late January. My sense is that the quarter to be reported and the current quarter will be dismal (although RIMM no longer gives forward guidance) given the iPhone5 launch in Sept and the strength of Android. If the company disappoints, the stock could see a pull back to it’s 200 day moving average at about $10.
Outright put purchases are expensive, but I want to use the opportunity of selling some weekly downside puts to finance the purchase of Dec regulars that will catch the earnings event.
Trade: RIMM ($11.95) Bought the Dec14th Weekly / Dec22nd Regular 11.50 / 12 Put spread for .59
-Sold 1 Dec 14th weekly 11.50 Put at .30
-Bought 1 Dec 22nd regular 12 Put for .89
Break-Even on Dec14th Weekly Expiration:
-Stock 11.50 or higher I own the Dec22nd 12 Puts for .59 and will look to spread them into the earnings.
-If the stock moves lower I will make the difference btwn the at the money strike that I am long and the lower strike that I am short.
-My Max risk is the .59, But I will look to spread these once the weeklies roll off or I cover them.
Trade Rationale: This is a bit of a cute trade, but if the stock trades up a little, down a little or stays right here, I will own an at the money put in front of earnings with a lot of potential options!
THIS IS NOT A TABLE POUNDING BEARISH CALL, LOOKING TO TAKE ADVANTAGE OF THE HIGH IMPLIED VOL OF THE OPTIONS THAT EXPIRE NEXT WEEK.
THIS IS A MEDIUM CONVICTION TRADE THAT I AM TRADING IN SMALL SIZE.