Notes: Sold off 2 of the last 3 earnings reports and the stock is down from recent highs and I think it will test lower after the report on Oct 2nd. I’ve also sold back half of my RIMM call spreads I bought two days ago for $0.30 (I payed $0.15).
Associate Alex’s Trade
First off, I hope nobody played the Apple pick yesterday because it got crushed.
My trade: Sell 13 lot ORCL Weekly (Oct12) 31.50 – 30.50 Put Spread for $0.28.
My reward: $28 per one lot
My risk: $72 per one lot
Why I like this trade: ORCL had a slight dip after it met analysts’ expectations but I think it should bounce back and I only need it to move $0.05 for the put spread to be out of the money.
Alex Kalish has a masters in economics from Suffolk U. alexk@keeneonthemarket.com
James Ramelli has a B.S. in Finance from UIUC. james@keeneonthemarket.com
Schlumberger’s annual earnings increased $0.80 from 2010 and is expected to increase another $0.65 from 2011. Quarterly revenues have been stable and should is expected to be higher in the next two quarters, after beating estimates three out of the last five quarters.
My trade is to buy the stock at $72.47 and sell the SLB Nov 67.5 Calls for $5.80. I expect an 8% return from selling the call. My risk is the stock free-falling to zero and my reward is the price of the call, $5.80. My break-even point is $66.67, which is also my risk.
Before diving into the fundamentals, a technical prospective is needed. Last quarter’s earnings gap sits from $8.87 to $7.98. 61.8% of this gap has filled during the August 6th -10th pop on rumors and speculation of IBM and RIMM getting together. This is naturally following the RIMM/Samsung and RIMM/MSFT past rumors; and considering RIMM’s 17% short interest, why not float a rumor out there for a good pop. Besides the unfinished gap fill, the rumor-powered prior high sits also near $8.47; so unhappy rumor buyers who are still stuck with stock may offer out supply at these lofty levels (lofty naturally being a relative term, especially for RIMM, as it has been sitting near lows).
Do the fundamentals back up today’s gap? In short, it depends on what RIMM story you subscribe to. RIMM has put forth many products that were intended to be ‘game changers’ but just ended up falling on their face. Wall Street seems to have a bad memory for prior flops include the extraordinarily hyped up Playbook Tablet. According to former CEO Lazaridis, “the BlackBerry PlayBook solidly hits the mark with industry leading power, true multitasking, uncompromised web browsing and high performance multimedia”…too bad it did not hit the mark in the sales category; with unit sales dropping to 130K this quarter. To put this figure into prospective AAPL moved 17 million iPad units in their most recent third quarter. Now CEO Thorsten Heins said confidently to investors that he believes BlackBerry 10 will take market share. If the new BB10 is anything like history is will not be good for investors. It can be argued that even if RIMM comes out with a superior phone it will not gain traction for the AAPL & GOOG movement is too powerful to stop, and they do not have the apps or ecosystem to back it up.
The chart below shows the annual percentage change in revenue, SG&A (Selling, General and Administrative Expenses), research and development, operating income, and finally cash and short term investments. This chart exemplifies RIMM’s problems. RIMM is burning through cash and not using it wisely, for the devices seem to always lack traction.
While all this is well and good, the trade could be something completely different. RIMM is a perpetual M&A rumor, but it is also difficult to stay short a name trading at $8.00 or a $4.2 billion market capitalization with nearly $1.7 billion in cash and short term investments, unless you have a lot of conviction. So maybe the best trade is no trade at all.
E-mail the author with any comments, questions, or any inquiry
Notes: I like this trade because when Apple makes big moves, it generally follow the same trend for a day or two after as we saw with this dip. I only need Apple to move up a third of the price it moved today to break even and if Apple explodes upwards past the upper wing of the butterfly, I will still make money, though less than if it stops at the body.
Alex has a master’s degree in economics from Suffolk U.
Out of the last 4 earnings reports the stock rallied twice and sold off twice. The near term at the money straddle is indicating a move of around $2.35 (10.9%). The stock has moved on average 11.3% on earnings over the past 4 quarters This gives us an upside measure move target of $25.05 and a downside target of $20.35.
Trade: Buying the Oct 22.5 Straddle for $2.35
Risk: $235 per 1 lot
Reward: Unlimited
Notes: The straddle is implying a move of 10.90% but the stock moves on average 11.30% after earnings.
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