Trader Inquiry… Playing RIMM Down To Under $10 (RIMM)

It is far from a secret that Research-in-Motion Ltd. (NASDAQ: RIMM) is in trouble.  It is a classic value trap rather than a value stock.  I recently  had an interesting conversation with a trader who still believes that RIM is headed south.  Very far south, even under $10 per share.  This is not just a one-sided ‘RIM Bash’ because many investors are still trying to buy it on the cheap and the call options often outpace the put options in trading volume.

The trader asked me, “What is the best way with options to play RIM dropping to under $10.00 per share in the next month or two without getting my head handed to me if I am wrong?”  Frankly, this has all sorts qualifiers because everyone knows that buying out of the money puts or calls will be worthless if they do not ever go ‘in the money’ on or before options expiration date.  It is purely risk-based capital.

After crunching these numbers and looking for the best leverage with the lowest premium and highest time value, my answer was the May-2012 $9 PUTS which currently trade at $0.14.  They are far less active than the May-2012 $10 PUTS at $0.24, but they are about half the price.  So if RIMs earnings (or guidance) turn out to be as horrible as this trader suspects, there is the opportunity for exponential gains.  Again, this was simply based upon the biggest bang for the buck with leverage and time value remaining after earnings.

The flip-side is what we said earlier.  If this stock does not drop under $9.00 there is no intrinsic value.  They could expire worthless and that means a total loss.  Still, it is the time value here that offers a larger comfort zone that even if he is wrong on the call there will at least still be some time value by the time RIM reports earnings.

So I asked why he was so adamant about under $10.00… It was not just that he does not believe the sales and earnings estimates.  Thomson Reuters has estimates of $4.16 EPS and $18.8 billion in sales for the year-end of Feb-2012.  Those estimates drop to $2.80 EPS and almost $17.5 billion in sales for fiscal Feb-2013.  What if RIM actually starts to lose money next year?  That is not a prediction, but that is what was proposed as a growing possibility as its market share in enterprises comes under further fire ahead and as its products are no longer very popular among new buyers.

As another caveat to only a one-sided view here, again to show both sides of the coin, keep in mind that RIM has a monster short interest.  At the end of February it was a whopping 59.2 million shares in the short interest.  That is a record going back at least a year.  If the shorts are wrong and RIM manages to guide “good enough,” this stock could explode to the upside even if the overall tone of the report is a negative one.

With shares at $13.97, RIM’s 52-week range is $12.45 to $64.63 and Thomson Reuters has a consensus price target of $16.08 on the stock.

JON C. OGG