Considering Our Options: $BBRY Jan Risk Reversal

by Dan June 28, 2013 9:33 am • Commentary

BBRY’s results and lack of guidance and future transparency is an all out disaster, plain an simple.  It appears that the new management has fallen victim to some of the bad habits of the old management as it relates to communication with investors.  Despite the initial optimism regarding the company’s new operating system and phones, BBRY has almost lost the war.  As I said was possible in my trade post yesterday (below) the bear case is playing out, and that sound you hear could be the death rattle for the company as a stand alone.  All that being said, and as I have been saying for months I think the sum of the parts looks fairly compelling btwn $10-$12.  So here we are down 25% right at that level, and the question now is, what do I do with my losing trade structure from higher?

With the stock at ~$11 this trade is worth almost -$1 intrinsically. Mark to market it is worse. We obviously need the stock to bounce back above 12 to even be even intrinsically but at that point mark to market the structure will still be a loser and won’t be break even unless it was to get back near where it closed yesterday.

Because of this fact we’ll need to make a decision whether the stock continues to get hit after it opens or if it bounces back a little. On the bounce scenario we need to decide if we’re ok with holding onto a mark to market loser that will get less worse overtime as long as the stock stays above 12 and gives us a lotto ticket for any takeover or activist investor action between now and January. If the stock continues to collapse we’ll need to decide when enough is enough.




Original Post June 27th, 2013:  New Trade $BBRY: Blame Canada

Despite BBRY’s 25% ytd gains, the stock still seems to be stuck in the mud, as much of the gains came in the first month of the year.  Investors have been sitting and waiting for any positive sales trends from the company’s new operating system and phones, and tomorrow morning’s earnings release could be the event that pops the stock out of the last few months’ range.  As I stated earlier today in my earnings preview (below), realized volatility is at 52 week lows, which shows a certain level of equilibrium btwn buyers and sellers, yet short interest is at 52 week highs, approaching 40% of the float.  Something has to give here.

As a trader I will quickly lay out the Bull / Bear debate in my head….

BULL CASE:  40% short interest, 1/3 of the market cap is in cash, no debt, earnings declines appear to have stabilized above break-even, Wall Street analyst sentiment horrible, perennial takeout candidate, and maybe just maybe if Carl Icahn loses his bid to buy DELL he sets his sights on BBRY.  Given their NOC assets, 75m installed base of users, patents and cash, the stock on a sum of the parts basis is very cheap below $12.

BEAR CASE:  they have lost every battle in the smart-phone and tablet space over the last 5 years, they are becoming a distant competitor to AAPL and Samsung and they are about to lose the war.  Bring your own device could cause material defections in the Enterprise and the company has been unable to create a desirable phone for consumers since the Pearl in 2006.  

Conclusion: I want to be a bit contrarian here, if Carl Icahn is interested in DELL I can not believe he or other activists would not be interested in BBRY.  I want to take a 6 month time horizon and create structure that costs me nothing in premium terms and defines a large range where I can lose nothing, a large range where I can make a lot of money on the upside, and a smaller out of the money range where I lose.

TRADE: BBRY ($14.55) Sold Jan14 12/10 Put Spread & Bought Jan14 16/19 Call Spread for .05 Credit

Sold Jan14 12/10 Put Spread at .75

-Sold 1 Jan 12 Put at 1.54

-Bought 1 Jan 10 Put for .79


Bought Jan14 16/19 Call Spread for .70

-Bought 1 Jan 16 Call for 1.79

-Sold 1 Jan 19 call at 1.09

Break-Even on Jan2014 Expiration:

-Profits of up to 3.05 btwn 16 and 19, max gain of 3.05 at 19 or higher

-Losses of up to 1.95 btwn 12 and 10, max loss of 1.95 below 10, and basically neutral btwn 12 and 16 (recieve .05 credit)

Risk Chart:

Screen Shot 2013-06-27 at 12.23.11 PM
from ThinkOrSwim

Trade Rationale:  Considering the stock has been trading within the range ($12-$16) for most of this year, i am likely to receive the .05 credit on Jan2014 expiration if there is no material fundamental changes, corporate action or m&a.  So I may be stretching a bit to the upside, but I like the fact that my worst case scenario is that if the stock is down ~30% to $10 I lose 1.95, but if the stock is up ~31% to $19 I can make $3, or 1.5x what I am risking.  Again my main point of the trade is that we see some sort of external intervention with the company that cause a new range for the stock.





Original Post June 27th, 2013 at 11:30am:  BBRY Fiscal Q1 Earnings Preview

Event:  BBRY will report their fiscal Q1 earnings tomorrow morning prior to the open.  The options market is implying about a 12% move post earnings (the June weekly at the money straddle is offered at about 1.70.  If you bought that you would need about a 12% move in either direction.)  The average move over the last 4 qtrs has been about 11.75, but 2 of the moves have been massive (~19% & ~23%) while the other 2 were very muted (~1% and ~5%).  Of the last 12 quarterly reports, the stock has only risen 3 times the day after, and only about 4% on avg.

Sentiment:  Despite a recent spat of analyst upgrades , Wall Street analysts  remains fairly negative on the stock with 9 Buys, 12 Holds and 22 Sells.  Short interest in the stock is approaching 52 week highs, with Bloomberg’s latest reading show ~40-% of the shares sold short.

Options Open Interest:  The split of total open interest is slightly favoring calls with 867k vs 748 puts, with the largest single open lines: 56k of the Dec 11 puts, 43k of the Jan14 10 Puts, 37k of the July 16 calls, 33k of the July 20 calls, 32k of the Jan14 20 calls, 31k of the Jan14 15 calls, 30k of the Jan 14 calls and 30k of the July 15 calls.

Earlier today a trader apparently rolled up call strikes, the Sept 17 / 18 call spread was bought for .27, selling 8300 of the 17s to close at .73 and buying 8300 for 1.00 to open.

Volatility Snapshot:  30 day at the money implied volatility has moved higher as expected into tomorrow’s earnings (despite not reaching levels in the last 2 reports), but what is most interesting is the divergence(below)  btwn realized volatility (white line) and implied vol (blue line).  The stock has been moving around over the last month at the most muted pace in more than a year.

BBRY 30 day IV vs 30 day realized vol from Bloomberg


Price Action / Technicals:  BBRY has performed very well this year up ~25%, despite most of the gains coming in January, with the stock banging around btwn 13 and 16 since.  For all intents and purposes, the chart is fairly constructive, forming a fairly nice base with the $12/$13 range serving as decent near term support.

BBRY 1 yr chart from Bloomberg
BBRY 1 yr chart from Bloomberg

On a longer term basis, there is just a ton of room overhead, and when you consider the stock has 40% short interest it is almost impossible to short in front of the routine take-over rumors, speculation of activists like Carl Icahn, cheap valuation and the potential for some day that they actually have a phone that people will want to buy.

BBRY 2 year chart from Bloomberg
BBRY 2 year chart from Bloomberg


Fundamentals:  To rehash all the gory details of this years BB10 operating system launch and the subsequent phone offerings would be a tad boring, and to be honest the most interesting perspective that I have heard on BBRY this year was in Barron’s May 13th edition citing a Jeffries analyst:

If even a fraction of enterprises take up BES and the NOC, bulls think it could boost the stock. Peter Misek, who follows BlackBerry for Jefferies & Co., and rates its shares Buy, doesn’t expect BlackBerry will win the smartphone wars. But with perhaps 500 million corporate users of email on mobile devices, worldwide, Misek reasons that if just 10% of them were to take up BlackBerry’s offer to use the NOC, and if each one paid $100 per year, the result would be a steady $5 billion in revenue for BlackBerry annually.

Put a 42% operating margin on that, and you could be looking at $2.50 per share in earnings, for a stock worth $30 at a P/E multiple of 12. With a steady $5 billion in security revenue, BlackBerry could be attractive to an acquirer, he thinks. For example, Misek speculates that Microsoft might want to boost its standing in mobile by buying the company.

MY VIEW:  A few weeks ago on June 4th in the MorningWord (here) I laid out my view, here is an excerpt:

I have been fairly consistent that the company does not have a future as a stand alone but, with its very strong balance sheet (36% of the market cap in cash & no debt), 70 plus million users and stabilizing service revenues, the company could be a very attractive take-over candidate.  I have also been very consistent in suggesting that the sum of the parts is much less attractive in the mid to high teens, but should see significant valuation support in the $10-$12 range.

So I am torn between what I think the value of the different moving parts, the potential for the company to be finally taken out, the potential for a kick ass activist like Carl Icahn to take a large stake and effect change vs the very plain and simple knowledge that their current product portfolio is just not that compelling or competitive and that the bring your own device trend in the enterprise has the potential to very quickly erode their subscriber base.

We are looking at some potential trades, but unfortunately the best trades on the board look like the “lotto” ticket trades, playing for the age old take out.  We will be sure to post anything that peaks our interest.