TRADE MANAGEMENT: RIMM: Report FYQ2 Next Week, Unless they Say “Exploring Strategic Alternatives” the Stock is Going Lower

by Dan September 15, 2011 2:12 pm • Commentary

Update Sept 15th, 2011:  Since putting this trade on last week the stock has essentially gone sideways (down 2.5%)…..there is a good bit of skepticism as you would expect heading into the quarter and I wonder at this point if  it all too obvious.  EARNINGS ARE TONIGHT AFTER THE CLOSE :I am convinced that this company is screwed as a stand alone, but with their mere $15bil market cap I wonder who could swoop in and buy them for their patents which they spent a lot of time and energy defending most of the 2000s and their installed base……heck GOOG paid a massive premium worth $12.5billion for MMI, someone could clearly pay $25bill for RIMM.

The Sept 29/24 Put Spread that I bought last week for 1.00 is now worth 1.30 and I am going to sell it here and roll into a further out of the money, lower probability play into earnings.

NEW TRADE: I am going to take the .30 profit and now buy the Sept 27.50/25 Put Spread for .60 (RIMM 29.60)  My break-even on tomorrow’s expiration is 26.90 on the downside and bwtn 26.90 and 25 I can make up to 1.90.   AT this point I have no clue what sort of guidance they will give and frankly don’t believe this management one way or the other, so I want to risk less to make a bet that they will guide down.

Original Post Sept 9th 2011: RIMM: Report FYQ2 Next Week, Unless they Say “Exploring Strategic Alternatives” the Stock is Going Lower

Next Thurs, Sept 15th after the close, RIMM will report their Fiscal Q2.  The options market is implying about a 10.5% move vs the 4 qtr average move of about 10%….

I want to make a defined short play into the event………

TRADE: RIMM $30.46 Buy Sept 29/ 24 Put Spread for 1.00

-Buy Sept 29 put for 1.25

-Sell Sept 24 Put at .25

Break-Even on Sept Expiration:

Profits: btwn 28.00 and 24 make up to 4.00, below 24 make full 4.00

Loses: btwn 28.00 and 29 lose up to 1.00, above 29 lose full 1.00

TRADE RATIONALE:  Stock has rallied 33% off of the summer lows and I have to think any incrementally better news is in the stock.  The company is going the way of Palm or NOK, it is unavoidable.  Unless they say we are “exploring strategic options” as been urged by a few large shareholders no one will believe their guidance.  Their products suck and their management and strategy are worse.  Their patents maybe worth something but I don;t think we will see a MMI sort of deal if a buyer just wants the patents, why own the declining asset of the handset business.

Technicals: Chart has a ton on air above current levels and given the recent run a good bit of enthusiasm on a short term basis.

[caption id="attachment_4581" align="aligncenter" width="300" caption="1 Yr RIMM chart from Bloomberg"][/caption]


Generally I am not in the business of pressing shorts, but to me this is a terminal short and I want to make short term, catalyst based defined bets.  I am risking what I am willing to lose and I like the 5 to 1 payout potential of the vertical spread….won’t take much on the downside to break-even given the stocks recent run.

RISKS TO THE TRADE:  There has always been the takeover speculation since the stock broke last year, and in an irrational market like we are in today, companies fighting for relevance can and will do dumb acquisitions (see MSFT for Skype and GOOG for MMI).   RIMM is very cheap on a valuation basis, but then again so was NOK and MOT the whole way down.

The Playbook tablet was likely a dud and if there is any good news on this front it probably has to do with some funky games the company plays by stuffing their selling channels rather than actually selling to end users…..

As for new products in the qtr they where obviously all evolutionary, not revolutionary.  iPhone 5 push out could have helped them a bit at AT&T and VZ as the life-cycle of the iPhone4 was getting old….

I guess my final take is that any good news on the margins or revenue re-acceleration I just don’t buy and would be a very near term phenomenon.  The company needs to spend a ton more on R&D to be at all relevant…..So unless they say they are dropping their OS for Android, or they are exploring strategic alternatives I think we could see a sell off back to mid 20s post any disappointing results or guidance.