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RIMM drops, but call buying continues in the front-month series
Beth Gaston Moon is the Senior Editor for the Options News Network. Beth was a member of the research department at Schaeffer's Investment Research for more than a decade. February 9, 2010 8:50 EST Related Symbols: RIMM
Earnings are expected from Research in Motion Limited (NASDAQ: RIMM) after the close on March 31st, and analysts are projecting per-share results of $1.27. With these numbers still more than six weeks away, Piper Jaffray is making projections, saying yesterday that the BlackBerry parent’s February quarter is tracking well versus estimates (although the firm did maintain its “neutral” rating on RIMM shares).
Despite these encouraging words, RIMM dropped 1.6% on Monday, losing $1.08 to close at $66.67. The February 65-strike straddle closed the day at $3.84, illustrating the options market is predicting a 5.6% move in RIMM shares (either an advance or a decline) between now and expiration one week from Friday. Such a move could lift the stock to $70.51, taking out months-long resistance or send it spiraling lower to $62.83, which would represent a breach of the stock’s 50-day moving average.
With volatility still part of the equation, it is no wonder that option traders remain active in the front-month series. In Monday’s trading, we saw more than 22,000 contracts trade at the February 70 call strike. A number of small and mid-sized block trades changed hands throughout the day, with most blocks trading between 65 and 70 cents per contract. Midday, this call was trending higher despite a decline in the stock, suggesting that buying pressure was lifting implied volatility on the option. At the close, the call had lost just 20 cents on the day despite the $1.08 drop in RIMM shares.
If option traders in fact bought these calls to open (open interest moved modestly higher this morning), then RIMM would need to rally to $70.70 in order to make this call profitable. That represents a rally of more than what the straddle is currently projecting. The maximum potential loss for a long call position is simply 100% of the premium paid (plus commissions).
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