Trade Update June 29th, 2012 at 10:33am: Ok well there you have it, just like playing the lottery, the likelihood of winning on “tiny” calls in a name like RIMM, just ain’t great. I am updating the trade below as I think this is an important teaching point for some newbies to options trading or trading at all.
Every so often as a trader, when I am “feeling it,” meaning making money, I like to do admittedly dumb trades every so often, trades that I know I will likely lose on, but where I like the risk/reward. In this case, after coming off a pretty good couple weeks of trading, and sentiment so poor in RIMM, and with the weekly calls on a premium basis so low (low meaning $ not vol) I wanted to take a shot. I hope I don’t sound too defensive on this one, but I think I fairly clearly laid out that point, and aside from the negative sentiment in the name, there was no reason to buy the stock (as I laid out below) and as I repeated on Fast Money on Wednesday night:
So here is the thing, the news sucked, and there doesn’t appear to be anyone not asleep at the wheel up there in Waterloo Ontario, the company is toast, their products are toast, and at this point those of you still tapping on those tiny little keys might as well get used to touchscreens. So the take away here was that I risked a portion of my recent trading gains on a long shot, that I was fully prepared to lose. This is where sizing comes in, just because the premium was low on a dollar basis, doesn’t mean the position should be out-sized, especially given the estimation of the chances of success, and I guess that is the main point, the position was sized properly in my book, and as Enis put it this morning in his Macro Wrap, I am not crying over spilled milk, especially as I was fully aware of this outcome.
Now I will get back to doing real work on real stocks!
Original Post June 26th, 2012:
RIMM is down about 7.5% since yesterday’s downgrade of the stock to an underweight rating on what the analysts cites as “rapidly deteriorating fundamentals”………NEWS FLASH: TITANIC HITS ICEBERG.
There is no real fundamental reason to buy the stock at current levels other than valuation, but that appears to be a moving target. No doubt about it this stock continues to be a value trap as the bulls (if there are any left) point to a low single digits PE, Enterprise value of only $3billion ($4.7b market cap, $1.7bil in cash and no debt) and expected sales this year of $12.5b.
I have been on record for years as not a fan of the company, their strategy and most of all their products, but since I started hearing the death rattle late last year I have take a couple “shots” with defined risk through calls or call spreads that the company would get a clue and sell itself, those didn’t work out.
BUT with the stock trading at levels not seen since December 2003, and the bearish chatter increasing at such low levels, I am hard pressed not to take one more “shot” in Thursday’s Q1 earnings report.
I am going to risk what I am willing to lose and Buy some weekly upside calls that look dollar cheap, they are a pure play that there is some unexpected announcement and the stock rallies above levels where it was trading just Friday afternoon to break-even. Also short interest keeps ticking up to just above 15% with the latest reading per Bloomberg data, or about 66 million shares.
To me the bear story is well known and even with the cash burn argument very real (company is expected to swing from earnings of of 4.20 in fiscal 2012 to only .25 in fiscal 2013, which could easily turn into a massive loss) but any solid plans to realize value from their installed base and their patents could cause the stock to rally 10-20% in the short run.
TRADE: RIMM ($9.10 ) Bought June29th weekly 10 Calls for .17
Break-Even on Friday 4pm close: 10.17 or higher…..
Trade Rationale: Obviously u need a massive move to make money here, but with the premium so low on a dollar basis, certainly not on a vol basis. Rather than going to play the mega-millions I am gonna play RIMM’s earnings event.
This is not the sort of trade you do to make up for some bad ones of late, this is the sort of trade you do when you have “risk capital” meaning recent gains from profitable trades. I fully expect to lose money on these calls.