It’s been a month since we’ve really looked at Research In Motion (RIMM, $119.22, up $3.16) but it looks as though the stock could be headed on the way back up. The stock got hammered after the company missed Wall Street’s estimates by a penny but after testing the $100 level, traders seem to be warming up to the company again.
The sell-off in RIMM may have been a little too much but let’s step back and review what happened. When the company missed earnings, yeah, they missed by a penny, 84 cents versus expectations of 85 cents. Revenue was off $30 million, $2.24 billion versus $2.27 billion. And they lowered their outlook. The number that was really “overlooked” by Wall Street was that revenues grew 20% and their earnings miss was due to slightly higher expenses and a slight decline in gross margins (-0.4%). That slight “point four” decline is from a gross margin of 51.8%. Not too many companies out there can claim gross margins of 50%.
We did a strangle trade on RIMM before they announced earnings. I had factored in a huge move in the stock price but was unsure of the direction. The strangle trade provided us a safety net in either direction but the move in the stock had to be 15%-20%. Which is exactly what we got when the stock dropped 20 bucks after the announcement. The trade was good for a 10% return and it was only a one-day gig.
What would have happened if RIMM had exceeded expectations? The stock was in the $140’s before the earnings miss and if RIMM would have beat expectations then maybe it would have traded higher. There were a lot of negatives Wall Street gave the company with their earnings but when you step back and look at the big picture, now may be the best time to get into a trade.
The company has a slew of new devices coming to the market and one of them is right around the corner. When RIMM announced earnings it also said at the time that the BlackBerry Bold would be delayed from late July to early August. Well, August will be here Friday. Other smartphones coming to market are the Kickstart and the Thunder. The Thunder is expected to give Apple’s (AAPL, $159.88, up $2.80) iPhone a run for its money.
The bulls seem to be rallying the troops for another run to $150 ahead of the release of these products. The good thing here is there will not be an earnings announcement anytime soon. The only news that will be coming out of the company should be good news about their upcoming products. I say “should be” because you always have to prepare for anything.
I’m not recommending a strangle trade this time around, instead I’m going with the September 140 calls (RULIH, $1.80, up $0.53). If by chance RIMM opens higher this morning, wait 30 minutes after the opening bell to go long. I would buy them up to $2.00-$2.10. The August option contracts expire in 16 days so this is why I’m going into September. We will target the $3.00 area as our first exit point but we have to get there first. I’m going to set a “mental” stop loss at $1.00 for RIMM due to the volatility but its not a hard stop loss. Let’s give the trade time to develope and go from there.
Rick Rouse
Rick@OptionsMentoring.com
