RIMM: These Guys are Screwed, But There May Be an Opportunity on the Long Side or To Play Potential Volatility

by Dan June 8, 2011 10:37 am • Commentary

RIMM ($37.50) reports earnings June 16th after the close, the implied move in the options market is about 10%, vs the avg 8 qtr move of about 8% (not including the April gap lower of ~10.5% on their pre-announcement). 

I have been short the stock through Put Spreads and Put Flys for months….taking some of those profits and gonna be a bit contrarian here….

RIMM lowered guidance for this qtr when they reported March 24th and then lowered that guidance on April 28th…..Stock has been punished and the hits keep on coming….these guys are really screwed, in my opinion, and have very few options for avoiding the course of NOK and MMI.  Their product strategy, actual product positioning and management have little credibility at this point and have very few organic options to get themselves out of the myopic mess they have gotten themselves into…..Their only chance to for success (albeit a slim one is to totally abandon their operating system and adopt Android…..)   The other suggestion is that with their installed base of corporate users this asset at the right price could finally make sense to MSFT.  If and and a BIG IF, MSFT has something with their new mobile OS, and some of their plans to integrate social and Skype to their online/mobile presence have some legs, then a hardware platform that is already in use could serve them well to play catch up in the OS war with AAPL and GOOG.  Rumors last week don’t make a ton of sense to me when MSFT would maybe be able to get RIMM for a price not too much higher than the rumored $19billion for NOK’s hardware biz.

As it relates to this quarter, the stock is very oversold and I am hard pressed to think that they miss this quarter’s twice lowered guidance…..and if they are able to maintain next quarter’s guidance and that for the year, the stock will rally….The guidance for the year is a HUGE IF…it seems unsustainable at  this point….but again I want to define my risk and make a tactical bet that they rip the shorts near term…MAKE NO MISTAKE ABOUT IT, I AM NOT CALLING A BOTTOM IN THE STOCK, THE FUNDAMENTALS ARE BAD AND GETTING WORSE, BUT SENTIMENT SO BAD THAT IF THERE IS A SLIM CHANCE THEY DON’T DISAPPOINT THE STOCK WILL RIP.

SHORT TERM BULLISH TRADE INTO THE PRINT: RIMM (37.50 ref) BUY JUN 40/42.5 Call Spread for .50*

-Buy Jun 40 call for .85

-Sell Jun 42.5 call at .35

Break-even on June Expiration:

Upside: btwn 40 and 40.50 lose up to .50, btwn 40.50 and 42.50 make 2.00 and above 42.50 make 2.00……worst case stock below 40 lose all .50 premium.

*disclosure- I am long this for .50


OR BUY THE MOVE...If you feel that the odds of the company to capitulate and lower their lofty Fiscal Year Guidance are similar to that of their ability to lie to investors and maintain their guidance than Buy June Strangles.

TRADE RIMM (37.50) Buy the June 35 /40 strangle for 1.70

-Buy June 35 Put for .80

-Buy June 40 call for .90

Break-even on June Expiration:

Upside: stock 41.70 or higher make money….btwn 40 and 41.70  lose up to 1.70

Downside: 33.30 or lower make money…..btwn 35 and 33.30 lose up to 1.70

Worst case: if stock btwn 35 and 40 lose 1.70,


OR the Take-Out Trade:

RIMM (37.50) Sell the Jan12 27.50 Put to Buy the Jan12 42.50 / 50 Call Spread

-Sell the Jan12 27.50 Put at 1.45

-Buy the Jan12 42.50 call for 3.30

-Sell the Jan12 50 Call at 1.50

Structure Costs .35

Break-Evens On Jan12 Expiration:

Upside: btwn 42.15 and 42.50 lose up to .35, bwtn 42.50 and 50 make up to 7.15, above 50 make full 7.15 or 19%.

Downside: btwn 27.50 and 27.85 lose up to .35, below 27.50 (down 26%) lose .35 and you are Put the stock at 27.50


Or if you think there is a high probability that MSFT would pay cash by Jan12 expiration consider:

RIMM (37.50) Jan12 40 / Jan13 50 Diagonal Call Spread for .15

-Buy Jan12 40 call for 4.15

-Sell Jan13 50 call at 4.00

Break-evens on Jan12 Expiration:

Upside: btwn 40 and 40.15 lose up to .15, above 40.15 have gains to 50…..now this is where this gets tricky, if it was a cash deal then most of the time value would come out of the Jan13 options and that would be a huge win, but if for stock and cash would be less decay.  But if the stock is 40 or below and you were to unwind the trade on Jan12 expiration, the Jan13 50 call would prob be worth about 2.50 or so if vol stayed around current levels and you have to make a decision whether to roll the long calls or possibly turn into an overwrite if you still believe in the thesis…..If you don’t and decide to unwind you will have losses as the Jan12 40 call expired worthless and to buy back the Jan13 call it will cost you, unless the stock was much lower to a point where the jan13 50 call was basically worthless……