Research in Motion Earnings Play
- Posted by Greg Harmon
- on June 15th, 2011
Research in Motion (ticker: $RIMM) releases earnings Thursday after the bell. This gives a unique opportunity to play the earnings using options. With the June expiration on Friday these options only have one day after the earnings release before they expire. So how best to play the trade. The charts give some clues. The daily chart shows that it has moved about 50% from its peak at 70 in February. It has a Relative
Strength Index (RSI) of 19.7 which is very low and oversold, but the Moving Average Convergence Divergence (MACD) indicator is relatively flat. It has been oversold since the beginning of June. Moving to the weekly chart below shows that it is a previous support at 35.11 from 2008 and 2009.
This chart is also oversold with an RSI at 22.33 but the MACD is flat on this timeframe as well. There is also some resistance to be found at the 39 area from 2008. Moving out further to the monthly chart shows a channel from 20 -30 that held for 2 years from 2005 – 2007.
So RIMM is at support and has support lower at 30. To the upside resistance around 39. What do the options say? The June 35 Straddle with 2 days to go is priced at about 3.35 anticipating a 9.5% move by Friday close. That makes for a range of 31.75 to 38.5 in the stock if it goes nowhere Thursday. The Implied volatility of the June options is through the roof at nearly 200% compared to the July options at 64% and historical just under 38%, elevated for earnings.
Trade Idea: Sell June 37.5/32.5 Strangles for $1.43
Do this by selling the June 37.5 Strike Calls and selling the June 32.5 Strike Puts. This trade protects against the expected move and takes advantage of the raised volatility. The Strangles expire worthless if the price settles between the strikes and the trade makes money within the range of 31.07 to 38.93, a bit broader than the expected move. Additionally there should be a volatility bleed out of the options Friday morning that may create a trading opportunity.
Alternative Trade Idea: Sell June 40/32.5 Strangle for $0.95
This widens the range to make money to 31.55 and 40.95 and the range where you collect the full premium to 32.5 to 40. If you are biased to the upside this might be your preference.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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