Considering Our Options – $BBRY Risk Reversal

by CC August 12, 2013 3:25 pm • Commentary

About a month and a half ago, Dan initiated a longer term bullish BBRY trade that looked to take advantage of weakness in the stock to establish a structure (below) that could be profitable to the upside with defined risk to the downside. Since then the stock blew up on earnings, and continued to make lower lows as investors just gave up on the turnaround, only to just recently get up off the mat as the company is once again exploring “strategic alternatives”,  which to be fair was the only bullish argument for putting on the trade in the first place. The problem is there’s still a ways to go to where the original trade gets back to even and even more room to go until the bullish strikes of the structure would come into play.

So let’s look at where the structure stands and what we’re looking to do with it. To recap, here’s the original trade from June 27th, 2013:  

TRADE: BBRY ($14.55) Sold Jan14 12/10 Put Spread & Bought Jan14 16/19 Call Spread for .05 Credit

Sold Jan14 12/10 Put Spread at .75

  • Sold 1 Jan 12 Put at 1.54
  • Bought 1 Jan 10 Put for .79

and

Bought Jan14 16/19 Call Spread for .70

  • Bought 1 Jan 16 Call for 1.79
  • Sold 1 Jan 19 call at 1.09

With the stock at 10.90, this trade is down about a dollar, and would essentially need at least another 1.10 rally in the stock before it was intrinsically worthless on January expiration. Because we have a long time until January expiration, it will need to rally even more than that to get us back to even on the structure in the meantime. Therefore, the trade is not setting up well with its current strikes. That could obviously change if this bounce off the lows were to continue if any interested parties emerged,  But since 16 is so far away, we’d be likely to have to re-assess the entire position in the midst of any continued strength. On the flip-side, if this is all the stock has and it continues to to stay in the doldrums below 12, we’d have to make a decision on trading out of the position for a loss like the one we have now.

Right now the trade is intrinsically about a dollar loss, which is also about where it is trading mark to market. Therefore we don’t have to make any decisions just yet. But the stock’s action over the next few weeks could tell us whether it’s worth sticking around in the name until January or if it’s time to cut our losses in the name and move on.  In any case we would likely just cover the short put spread and leave the long call spread on as sort of a lotto ticket.

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New Trade $BBRY: Blame Canada

3:20 pm EDT – June 27, 2013 By

Despite BBRY’s 25% ytd gains, the stock still seems to be stuck in the mud, as much of the gains came in the first month of the year.  Investors have been sitting and waiting for any positive sales trends from the company’s new operating system and phones, and tomorrow morning’s earnings release could be the event that pops the stock out of the last few months’ range.  As I stated earlier today in my earnings preview (below), realized volatility is at 52 week lows, which shows a certain level of equilibrium btwn buyers and sellers, yet short interest is at 52 week highs, approaching 40% of the float.  Something has to give here.

As a trader I will quickly lay out the Bull / Bear debate in my head….

BULL CASE:  40% short interest, 1/3 of the market cap is in cash, no debt, earnings declines appear to have stabilized above break-even, Wall Street analyst sentiment horrible, perennial takeout candidate, and maybe just maybe if Carl Icahn loses his bid to buy DELL he sets his sights on BBRY.  Given their NOC assets, 75m installed base of users, patents and cash, the stock on a sum of the parts basis is very cheap below $12.

BEAR CASE:  they have lost every battle in the smart-phone and tablet space over the last 5 years, they are becoming a distant competitor to AAPL and Samsung and they are about to lose the war.  Bring your own device could cause material defections in the Enterprise and the company has been unable to create a desirable phone for consumers since the Pearl in 2006.

Conclusion: I want to be a bit contrarian here, if Carl Icahn is interested in DELL I can not believe he or other activists would not be interested in BBRY.  I want to take a 6 month time horizon and create structure that costs me nothing in premium terms and defines a large range where I can lose nothing, a large range where I can make a lot of money on the upside, and a smaller out of the money range where I lose.

TRADE: BBRY ($14.55) Sold Jan14 12/10 Put Spread & Bought Jan14 16/19 Call Spread for .05 Credit

Sold Jan14 12/10 Put Spread at .75

-Sold 1 Jan 12 Put at 1.54

-Bought 1 Jan 10 Put for .79

And

Bought Jan14 16/19 Call Spread for .70

-Bought 1 Jan 16 Call for 1.79

-Sold 1 Jan 19 call at 1.09

Break-Even on Jan2014 Expiration:

-Profits of up to 3.05 btwn 16 and 19, max gain of 3.05 at 19 or higher

-Losses of up to 1.95 btwn 12 and 10, max loss of 1.95 below 10, and basically neutral btwn 12 and 16 (recieve .05 credit)

Risk Chart:

Screen Shot 2013-06-27 at 12.23.11 PM
from ThinkOrSwim

Trade Rationale:  Considering the stock has been trading within the range ($12-$16) for most of this year, i am likely to receive the .05 credit on Jan2014 expiration if there is no material fundamental changes, corporate action or m&a.  So I may be stretching a bit to the upside, but I like the fact that my worst case scenario is that if the stock is down ~30% to $10 I lose 1.95, but if the stock is up ~31% to $19 I can make $3, or 1.5x what I am risking.  Again my main point of the trade is that we see some sort of external intervention with the company that cause a new range for the stock.

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