Since buying the BBRY June/July 14 Put Spread last Monday, the market has witnessed some fairly crazy action in stocks with high short interest and with high concentration among the largest holders. As I described earlier in the MorningWord, BBRY falls right into this category with ~37% of the float short with the top 10 holders owning ~37% of the shares outstanding. While the current product portfolio stinks by most accounts, despite the new OS and the new phones, my thought is that the least bit of good news on the BES (Blackberry Exchange Server as described in Barron’s this weekend) or news of an unforeseen new activist investor, possibly of the Icahn type, could get the shares ramping towards $20.
Despite the stock up a tad in the last week, the realized volatility has picked up just a bit, making this put spread with a small delta a little more valuable. Some of the price action in the last week in names like TSLA, SCTY, HLF & GMCR has caused me to reconsider where I think the low end of the range is in BBRY, and I am now going to close the position as I lack the conviction I had last week about a drift lower.
ACTION: Sold to Close BBRY ($16.03) June 22nd / July 14 Put Calendar at .60 for a .05 gain
[hr]
Original Post May 6th, 2013: New Trade $BBRY – Canadian Bacon
When I think about BBRY, the products, their competition, their management and their challenges to regain a path towards profitability and revenue growth I can’t help but think they will eventually go the way of PALM, MOT, or NOK. While the old management, which consisted of the company’s founders presided over the rise and fall of a near monopoly, the new management appears to be equally challenged when it comes to anticipating the future of mobile computing when you read recent quotes like this from CEO Thorsten Heins in a Bloomberg interview on April 30th, 2013:
“In five years I don’t think there’ll be a reason to have a tablet anymore,”
Right, this guy is seeing something that AAPL and Samsung are not, both of which are risking cannibalizing a huge chunk of their existing PC and Mobile phones revenue mix to bet on the category.
The stock will obviously have its fits and starts – just ask the shorts who were playing for the equity to trade at cash last year (whoops).
While I do not think the stock is invest-able at current levels given all of the product and competitive uncertainties, I have been on the record and continue to believe that there is a price (probably closer to conservative sum of the parts valuations around $10) that the risk/reward of being long is skewed to the long side.
In preparation for a Bull / Bear Debate tonight on Fast Money on CNBC at 5pm, I thought I would jot down a few notes as I am facing the fearsome Guy Adami (friend of the site):
1. BB10 phones Z10 and Q10 have met less than stellar customer reviews and higher than expected returns for the Z10.2. Q10 demand (the qwerty keyboard phones) appear to be better than the touchscreen models which is a surprise, but doesn’t bode well for their ability to compete with new Samsung Galaxy or iOS3. The real question for the stock is whether the dramatic earnings decline can be halted with increased margins from new phones??4. In my opinion stock has serious valuation support on a sum of the parts btwn $10 and $12, but high teens seems a bit stretched. Main value is the company’s approx 75mil users of which at most 25% are enterprises users where the company charges service fees. Bring your own device options at large businesses is seriously challenged.5. Almost a third of the market cap in cash, so if company can stop burning cash and stem customer defections than than they maybe able to remain standalone , if they can continue to compete on the high end.6. I think very unlikely the company can succeed against iOS and Android as a standalone given margin pressure and secular changes in enterprise mobility.
1 year BBRY daily chart, Courtesy of Bloomberg[/caption]
The 50 day ma (pink) flat-lining around 14.50 is indicative of a range-bound name, and there are no major catalysts until the June 28th earnings report. (AAPL has its WWDC on June 10th, announcing its new OS, but at this point the BBRY story is really dependent on what BBRY does, not the competition.)
This setup lends itself to a similar trade structure to last quarter, where we had success trading a calendar spread heading into the earnings event. Our thought was that the options that captured the earnings event would remain well bid, while options that expired prior to the event would decay much quicker. Given the stock’s rally to near 16, no clear catalyst prior to earnings, and a rangebound technical situation, we like a similar trade once again:
TRADE: Bought the BBRY ($15.72) June 22nd / July 14 Put Calendar for $.55
-Sold 1 June 22nd 14 put at $ .65
-Bought 1 July 14 put for $1.20
Break-Even on June Expiration:
-If the stock is above 14.00 the June puts will expire worthless and I will be long the July 14 puts for .55, which catch earnings and at that point I will look to spread.
Payout Diagram:
[caption id="attachment_25565" align="aligncenter" width="551"]
from TradeMonster[/caption]
As you can see from the diagram, not much will happen with this position in the near term (thin line) but as we get closer to June expiration any downside movement is profitable as long as it doesn’t go too far through the 14 strike. The short june option will decay at a faster rate than the long july option on a percentage basis with that percentage increasing as expiration approaches.
Trade Rationale: This trade structure will hold its value quite well as long as BBRY stays within the 12 to 18 range. The ideal scenario is that the stock leaks down towards $14 over the next 6 weeks, and is around there prior to earnings. In any case, the structure will gradually appreciate in my favor if the stock stays within a few bucks of the $14 level, and I can re-assess my options prior to earnings.