Research in Motion (RIMM, $100.90, down $6.05) is trading lower after opening the morning at $111. The volatility has picked up over the past few weeks after the stock made a run from $119 to $135. At the end of July, I mentioned that the company had three new phone models coming out: the BlackBerry Bold, the Kickstart and the Thunder which could move the shares higher.
Over the next couple of weeks the September 140 calls (RULIH, $0.04, down $0.01) went from $1.85 to $5.00 which netted us over a 150% return. I had mentioned that the stock faced serious resistance at $140 and we closed the trade. As you can see, with RIMM’s 35 point drop since our exit on August 8, these calls are now pretty much worthless.
The decline in the share price ahead of these new phones has given us another opportunity to go long. However, we may have to use some protection on the downside to mitigate some of the risk.
The good news is that the company sold 5.6 million smartphones from April through June, which was up from 2.5 million a year ago. This shows that RIMM is capturing more and more market share. For what it’s worth, the stock also got an upgrade this morning out of Morgan Keegan to “Outperform” from “Market Perform”.
I could care less about the upgrade but I do think RIMM is at the point of bouncing higher or breaking serious technical levels. The stock is right at its 200-day moving average and if it falls below $100, there’s a real chance the stock could dip into the $80’s. For this reason we will use some put options to hedge our bets. The September options expire in a few weeks so we will want to use the October options.
The October 120 calls (RULJD, $3.22, down $1.38) traded as high as $6.10 when the stock hit $111 earlier this morning and the October 80 puts (RFYVP, $1.82, up $0.62) hit a low of $1.37 in the process. We will do a two-for-one trade at current levels. This means for every two call options you buy, also buy one put option. If the stock can rebound and trade higher, the loss in the puts will be offset by the gains in the call options. Either way, I think RIMM will easily make another 20 point move higher or lower.