Welcome to Dragonfly Capital Views

• Posted by Greg Harmon
• on September 14th, 2011

Welcome to Dragonfly Capital Views. Each week the process of preparing and then arming you with trade ideas will begin with the Macro Week in Review/Preview to establish the trend and the inter-market factors that may influence that trend. This will be posted by noon on Saturday. Then on Sunday several trade ideas using stocks, or options or both will be posted with the entry, target and risk management strategy for each so you can be prepared for Monday. During the week adjustments to the strategies will be posted. New trades will be added during the week with the strategy for trading them as well. Since it is not the weekend yet here is an earnings trade idea on Research in Motion, $RIMM, which reports after the bell on Thursday. As an exception I will be releasing this trade to the general blog on Thursday after 1:00 pm. Take a look at it now.

The Set Up

After the last earnings release $RIMM fell precipitously as shown in the gap in the daily chart below. After breaking into the gap it failed at 32.50and is now back under the important 30 level. The Relative Strength Index (RSI) is heading sharply lower and the Moving Average Convergence Divergence (MACD) is crossing negative. These both support more downside. It is set up negative going into earnings.

Additionally the weekly chart below is bearish showing topping tails on the last 3 candles and a very weak RSI. This not surprising when you look left to see the two year price channel from 2005-2007 that ran between 20 and 31.

This is an earnings trade though and it has had big moves, so we need to be a bit cautious. The At-the-money straddle (both the 29 and 30 strike straddles) imply a 12.5% move in the stock by Friday’s close. With the bearish bias the trade idea is a bearish risk reversal.

Sell September 34 Strike Call and Buy September 26 Strike Put for 21c debit.

This gives upside protection for a 16% move. It should also allow a profitable exit on the downside as long as the stock stays under 30, and much more if it falls the full 12.5% or more priced in options. If the stock gaps higher over 34 on earnings you should buy stock to hedge the short call until the morning. If it plays out as the charts suggest let the short call expire and sell the put on any stall that might happen at support at the 27.50 area.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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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.

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