Research in Motion (RIMM, $104.61, up $5.31) made a 5% move yesterday and hit a high of $106 after intoducing a BlackBerry flip phone. Wall Street liked the news because it means RIMM will have the phone ready for the holiday shopping season. The company will also debut the BlackBerry Bold later this month.
I’m not sure if we caught RIMM at its bottom which is why we hedged our trade and so far it has been working. We looked at the October 120 calls (RULJD, $4.10, up $1.10) and the October 80 puts (RFYVP, $1.64, down $0.87). The calls were at $3.22 and the puts were going for $1.82. We used two calls for every one put. This gives us a total entry price of $8.26 ($3.22 x 2 + $1.82). At current prices we get a total of $9.84 ($4.10 x 2 + $1.64). That’s a 20% gain if you closed the the trade yesterday. That’s a sign of a savy investor.
Another option (no pun intended) you could have created for yourself is if you would have sold the calls at $4.10-$4.15 which would have given you a net of $8.20-$8.30 or enough to cover the original cost of the trade including the put option. Then you would have had the luxury of having a totally risk-free trade in RIMM. If RIMM suddenly breaks down from here and heads back below $100 then your puts will rise. If RIMM keeps going higher then you either sell the put or simply wait. Again, it all depends on what you want to do.
We are targeting the $5.50-$6.00 area for the calls so we will see how today goes. The stock will still be choppy but the options don’t expire until October 17…plenty of time.
Rick Rouse
Rick@OptionsMentoring.com
