As we get closer to yet another earnings report, I thought I would try my hand at a look at Research in Motion (RIMM), probably the most talked about stock this week as earnings fall on this Thursday. We will take a look at the health of the company, the earnings projection, short and intermediate term technicals, as well as options implied volatility and trade suggestions for this type of setup.
RIMM Fundamentals
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When it comes to value, RIMM certainly looks like a better buy than it did at the beginning of the year. Overall statistics show RIMM has grown its earnings per share 40% year over year from just over 80 cents a share in 2010-Q1 to better than 1.40 a share in 2011-Q1. Cash flow from last year’s numbers is much better than the industry average, as is Earnings per share. So why does Wall Street put RIMM as a hold with the average analyst?
Its not that RIMM is going bust, but they have slowed their growth, and mostly due to competition. Smart phones were a big part of their revenue and earnings, and competition over value, not price, has taken market share from them. So what did RIMM do to combat this? They tried a reverse tactic, and entered the tablet market. Problem is, their playbook did not exceed the expectations of the consumer. In fact, they ended up recalling the Playbook initially due to problems, smearing egg all over the face of the buyers as well as themselves. Its tough trying to fix a first impression. Research in Motion will get past this, but they wont be the same company they once were. Quarterly earnings projections scheduled to be released on Thursday are in the range of 1.37.
RIMM Technicals
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RIMM has dropped drastically, and if we were in a continued Wave 3 downtrend into earnings, I would be suspect that there would be a low put in this week. But that’s not the case here, as the Wave 3 low happened in August. Sine then, RIMM has rebounded some 25%, a standard retracement level. Since the beginning of September, this stock has once again started a downward move and currently sits around $30 a share. Projections here put it on a course to 14.25 when looking at Fibonacci extensions.
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Above you see the 60-minute chart. Wave 4 buy with a pullback that is 39% of the upmove that has happened the prior 30 days. This chart tells a different story and if the 29 support level holds, we should expect a short term continuation to a new high or at least a double top at 34.
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Above is the 5-minute chart of RIMM. The last two days have been very indecisive as traders now wait until the earnings report announcement. As of just today the stock stayed in a 1.20 range and I suspect this will continue into tomorrow.
One particular piece of data that is on the rise this month for RIMM has been the options implied volatility. In the last month, Short term IV (RED LINE) has more than doubled ahead of the earnings report, while Intermediate IV (BLUE LINE) has risen too, but only 10-15%. This has caused an implied volatility skew between the two IV’s.
Strategy Selection
Volatility has risen dramatically in this stock, and one might think that a straddle might be a great opportunity for this stock. Based on the shortest term chart above, RIMM looks like a great non directional opportunity, but its short term at best. The longer term chart looks slightly bearish, but how can we take advantage of this without the risk of higher IV?
One suggestion would be a calendar spread that takes advantage of the high short-term premium, which would help to pay for the longer term option. This is an OTM put calendar spread, which after September expiration could be converted to a vertical spread if the trader decided to hold.
There are several ideas for trading stocks either before or after earnings, but this type of skew might look great for traders who want to trade THROUGH the earnings reports.
Stay safe, stay hedged!
Tom Gentile
Vice President and Co Founder, Optionetics
