Name That Trade – $BBRY – Part 2: TakeOut Structure In Place of Long Stock

by Dan March 28, 2013 3:19 pm • Commentary

This morning BBRY reported fiscal Q4 results this morning that were better than the fairly downbeat expectations, but were not devoid of challenges.  After having a fairly hefty implied move of about 12%, the stock opened up almost 7% and has since spent the rest of the day making lower lows, with the stock no handily down 2.5% on the day.

In a note to clients this morning, MS analyst Ehud Gelblum summed up the results nicely:

Subscribers totaled 76M, down 3M q/q and 2M below our 78M estimate, as attrition from the BB7 base was not offset by gross adds likely as subs waited for the new BB10 devices to launch.

Service revenue of $964M was barely down from prior qtr of $974M, beating our $920M estimate, and not the disaster feared. We calculate ARPU of $4.15, above our $3.91 and flat with last qtr’s $4.08.

Adj. Gross margin of 40.3% was the big story as it grew a substantial 870 bps q/q from 31.6% in FQ3, well ahead of our 33% estimates. We calculate device gross margin of 13.6% up 1650 bps assuming a stable 85.5% GM for service and other.

Guidance is for breakeven financial results in FQ1, ahead of our (1.4%), including a 50% q/q increase in marketing costs, well-ahead of our 13% increase Cash flow from ops of $210M, down from $958M in FQ3 was well-ahead of our ($282M) estimate as inventory grew 32% q/q to $603M, resulting in qtr end cash balance of $2,875M.

BBRY has its it challenges ahead as the company’s Z10 launch in North America is coming weeks before Samsung’s pre-order for Galaxy S4 and 6 months ahead of AAPL’s next iPhone.  As I said last week in the MorningWord (read here):

I stick by my view that the easy money has been made in BBRY off of the 2012 bottom and the stock  remains a traders dream due to the volatility, but potentially an investor’s nightmare.  The 33% short interest makes it very difficult to short in the low teens, but the sum of the parts makes it a difficult long in the high teens.  Despite a few recent upgrades (MS to Buy and $22 target on Wednesday) the street remains overwhelmingly negative, there are only 8 Buy ratings, 16 Holds, 21 Sells with an avg price target of $12.21!!!    So You get my point this will be a very fluid situation,and likley to remain volatile.  If the stock were to head back to $12 or below on disappointing results, guidance, cash burn etc, I think there is a reasonable chance that some hard core activist investors get involved as the company is very cheap, and un-levered!

I would also add, that because the company was profitable in the qtr and guided to break-even next, immediate concerns about rapid cash burn appear to be off the table.  I will stick by my earlier view that the Z10 alone will not turn the tide for BBRY, and will likely just keep the company afloat before a buyer can come in and look to leverage their existing installed base of over 70million users.  This morning Jim Cramer had the following to say about BBRY:

So I guess to sum up, I think BBRY still in NO MANS LAND, and I think very hard to initiate a new Long in the mid teens, it reamins a “show me” story in my mind, but for those who agree with Cramer, I would suggest using options with defined risk ways to play for a potential take-out.

Back in Mid February following the excitement of BBRY’s introduction of their new operating system and touchscreen phones, I took a look at alternatives to owning stock (see post below) in an effort to play for such an event.  While I did not put this trade on, I want to update my thoughts on the structure and suggest that I would be very inclined to initiate such a trade structure, if the stock were to get back to suport at $12, where I think the sum of the parts valuation could be very compelling.

With the stock just a tad higher than my previous post, but with a great deal more information about the company’s progress since, I think it makes sense to adjust the strikes for my theoretical trade.  Theoretical because I want to have my thoughts and potential risk/reward scenarios in place in the event the stock does decline in the coming weeks/months.

Theoretical Trade Structure: BBRY ($14.25) SELL the Jan14 10/8 Put Spread to BUY the Jan14 17/20 Call Spread for ~.15

BBRY Jan14 10/8 Put Spread .55 Credit:

-Sell 1 Jan14 10 Put at 1.20

-Buy 1 Jan14 8 Put for .65

BBRY Jan14 17/20 Call Spread  .70 Debit:

-Buy 1 Jan14 17 Call for 2.20

-Sell 1 Jan14 20 Call at 1.50

Break-Even on Jan14 Expiration:

-Profits of up to 2.85 btwn 17.15 and 20, with max gain of 2.85 above 20.

-Losses of up to .15 btwn 10 and 17.15

-Loses of up to 2.15 btwn 10.15 and 8, with max loss of 2.15 below 8.00

Trade Rationale:  Again, I am not interested in putting on such a trade with the stock at or above $14, but if the stock were to come back to $12 or so, I would look to sell the Jan14 $10 strike put and either buy the $8 or $5 strike put to cover my downside risk. I like selling the $10 line as it should serve as significant support given the nearly $4.50 in cash, no debt and 33% short interest.  On the upside, $20 could serve as some serious upside resistance from both a technical and valuation perspective.  This structure is preferable to long stock as their is a huge range where the position risk a small premium outlay, while offering a 15% risk range if the stock was down ~43% on Jan expiration, while offering high potential reward in the event of a takeout.



Original Post Feb 15th, 2013:  

BBRY has become a short-term trader’s dream since the stock (formerly known as RIMM) bottomed in late Sept close to $6 is up more than 100% on renewed investor enthusiasm about the company’s new operating system and touch screen phones.  Readers of the site are very aware that I think the likelihood a of Blackberry “resurrection” so to speak is not great, and by the recent price action in the stock, there appears to be a raging 2 way battle going on.   I am currently long a Calendar Put Spread (see details below) as I think the stock may stay range bound (btwn $12 and $16) until the company’s fiscal Q4 earnings on March 28th, albeit a massive range, but I think the actual Z10 sell through will be disappointing.  

Which leads me to what I want to do if the stock is 12 or lower at some-point in the near future prior to their U.S. launch of their new Z10 handset.

Sanford Bernstein (along with many other brokerage houses) recently upgraded their view on BBRY based on the belief that BB10 launch will help stem their gross margin declines and return the beleaguered smartphone maker back to profitability.  They slap a 12 month price target on the stock which is likely at the upper end of most bulls’ sum-of-the-parts valuation.


That being said, I get a lot of questions from people who feel otherwise and think that the new OS will cause a massive upgrade cycle, and that the company’s $5 in cash on their balance sheet, patents that could be worth $1-$2 billion, and their 70 million users could be attractive to any number of potential buyers.   I don’t doubt this could happen, but the question that I would ask is whether or not it will be from a position of strength or desperation (like PALM and MMI)??

For those who want to buy the stock for a the potential of a takeout (Lenovo was recently rumored as considering a bid for RIMM), I would prefer to look to the options market than buy the stock at current levels and even a bit lower……..

I want to be clear on this. I am not putting this trade on today but would rather wait for some weakness in the stock near the 2013 lows (~$12).   At that point this structure would be for a credit BUT I WOULD PREFER TO ADJUST THE STRIKES LOWER.

Theoretical Trade Structure: BBRY ($14.15) SELL the Jan14 10/5 Put Spread to BUY the Jan14 15/20 Call Spread for EVEN MONEY

BBRY Jan14 10/5 Put Spread 1.40 Credit:

-Sell 1 Jan14 10 Put at 1.70

-Buy 1 Jan14 5 Put for .30

BBRY Jan14 15/20 Call Spread  1.40 Debit:

-Buy 1 Jan14 15 Call for 3.30

-Sell 1 Jan14 20 Call at 1.90

Break-Even on Jan14 Expiration:

-No Profit or loss bwtn  $10 and $15

-Profits of up to 5.00 btwn 15 and 20, with max gain of 5.00 above 20.

-Losses of up to 5.00 btwn 10 and 5, with max loss of 5.00 below 5.00

Trade Rationale: As I stated above, I am not putting this trade on here, as I think the stock is likely to see lower lows as we get closer to their fiscal Q4 earnings on March 28th.  This structure would set up nicely to put on in the event of a sell-off to $12 or so, as it provides a good bit of near the money upside while the downside risk is farther out of the money on a % basis. Think of it this way. The long call part of the trade is less than a dollar away from where the stock is trading while the short put part of the structure is more than 4 dollars away. So although it looks like you are risking 5 to make 5 (you are) the odds are in your favor due to where the stock is in relation to the spreads. So you have a higher probability on your call spread than your put spread due to where the stock is currently.



Research in Motion, ahem, I mean Blackberry, has been a trader’s paradise over the past 5 months.  The stock resurrected from the dead, moving from around $6.50 in September all the way to above $18 in January.  The company even attracted enough attention to make headlines on the Blackberry Z10 launch party, reminding us of a time when consumers actually cared about RIMM’s, I mean BBRY’s, next product release.

Now, the stock is basically trading on whether the Z10 will be a success or a dud. The company has placed its bets, and the market’s active trading shows zealots on both sides of the bull/bear debate.  Even illustrious tech reviewers like Walt Mossberg of the WSJ don’t have a clear-cut verdict.  Here was Walt’s conclusion in his review:

Bottom Line

The Z10 and BB10 represent a radical reinvention of the BlackBerry. The hardware is decent and the user interface is logical and generally easy to use. I believe it has a chance of getting RIM back into the game, if the company can attract a lot more apps.

Ah, the apps.  That’s the big missing piece to an otherwise nice bit of hardware.  It’s where the crux of the debate is going to line up over the next few months.  Dan Niles agreed with me on Fast Money on CNBC last week that working on the Z10 was a losing proposition for app developers, and the company was facing a serious uphill battle.

My chart friend, Mr. Taner, also does not like what he sees.  His chart and comments:  


1 year chart of BBRY, Courtesy of Bloomberg
1 year chart of BBRY, Courtesy of Bloomberg


BBRY had a strong momentum run from November to January, but each impulsive push was on less momentum, as shown by the RSI.  At this point, the up move seems somewhat exhausted, and I expect the stock to respect its range between 12 and 16 for the time being.

So Enis is expecting a rangebound trade in the short-term.  I think the backbreaker for the Z10 optimism is likely going to come on Blackberry’s next earnings report, currently scheduled for late March.

What caught our eye was the small vol differential between March (which does not capture earnings) and April (captures earnings) options.  Given the importance of this next earnings report as a signal for the potential success of the Z10, the options market does not seem to be adequately pricing the volatility there.

TRADE: Bought the BBRY ($15.02) Mar21st / Apr 14 Put Calendar for $0.64

-Sold 1 Mar21st 14 put at $1.12

-Bought 1 Apr 14 put for $1.76

Trade Rationale:

This trade is a cheap way for me to get long the earnings move more than a month away from the event.  The hope is that BBRY does not stray too far from the $14 between now and March 21st expiry, and then I will be long the Apr 14 put in BBRY for a low cost ahead of the pivotal earnings event.