The first graphic is a daily bar chart of price’s reaction to the past six earnings announcements from RIMM. Action after the event is rather bearish; in most of the sample set, four of the six observations, RIMM went down, but when it did indeed go up it promptly filled or reversed the day after. The gap is price’s way of adjusting to new news. While this gap may seem inefficient, the derivatives market, in most cases, was expecting said move given RIMM’s implied volatility.
Now to what is implied for the coming event, because the RIMM weekly options only have one day until expiration, they will be an organic way to derive what is implied for the event today after the close. Using a KOTM implied volatility & time-based model, we calculated the one-sigma move (68% probability within) to be roughly $1.32 up or down (or about 68% chance we settle between $$14.95 and $12.30 by the close on Friday). The two-sigma move (95% probability within) is $2.65 either way (or between $16.28 and $10.97). This is important because traders can place long/short strikes at these probability levels. The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is vital to know, especially if one is trading two different months in a spread.
The following chart includes the one and two sigma rolling probability cone, volume profile, and major moving averages (50, 100, 150, & 200). RIMM has been raging since September’s report, up over 100%. With that in mind, RIMM has been rejecting lower price levels as long-term traders take hold, moreover we are at the upper portion of the 6 month volume distribution. The 50 DMA will cross over the 200 DMA any day now forming the golden cross. On expiration Friday, the 50-day will sit n
early 27% away from current prices. This rally seems to have the characteristics of a short squeeze, for candlesticks have been long and violent. The ATM (at the money) front month $13.5 straddle (lifting the offer) is at about $1.48 (10.8% of stock). Deltas move to one faster near expiration, it is therefore easy to calculate immediate post event break evens, $15.11 & $12.15.
Feel free to e-mail any comments, feedback, suggestions, or general inquiries to… Author@ salernoma@mx.lakeforest.edu
