RIMM - Covered call

Background

I initiated a collar trade on RIMM on middle of September 2009 at $76.9. I caught the stock almost at the peak. It has been on a downtrend since.

I continued to trade for almost 10 months with many adjustments. Finally, I gave up and close the trade on August 26th selling it at 48.23 and closed all my options positions. It was a disappointment for me. I put in a lot of effort and yet could not realize its potentials.

Although the stock has fallen from $76.9 to $48.3, I still manage to make a small profit $600 for a position with 500 shares. This is a testimony of the power of options if used properly. I decided to cut as I was disappointed and believe a downtrend was imminent for the stock. My patience had run out. I also made a decision I will buy back when there are signs of bottoming trend.

Now the stock has hit a low of $42.53 and bounce back together with the market, I decided to re-enter the trade.

Fundamentals.

Fundamentally, I still like the stock.

o They are still the market leader with decent margins and growth although shares are slightly eroded by Apple iPhone and Android.

o RIMM is still strongly entrenched in the corporate market

o Recent problems of security in India and UAE are almost resolved. These account for 2% of their earnings

o RIMM is expected to trade under 10 times earnings and earnings to grown > 25% over the next 12 months.

o In April, the company said it will buy back 2 million shares

o It has a strong balance sheet with almost $3 billion in cash and no debt.

o Although the Torch has received lackluster reviews but it will still increase the sales RIMM with ATT $100m promotional campaign on national TV, print and online.

o The stock is clearly oversold. Also, its volatility is almost doubled what was earlier this year. Thus a good time for covered call

o With the current pricing and the cash rich environment of corporations now, I will not be surprised there could be a bid for the company. I rate the probability at around 15%.

Technical

It has shown some signs of short term bottom. The stock has hit support 3 times in the past and bounce up.

However, longer term trend is still bearish. It could still be dragged down to 2008 low and support of around $40-$41

With the rebound of the market, the probability of the stock going down <$41 is reduced. Actually, it should just bounce off from the support line. ( see figure )

Trade:

Covered call:

BTO 500 shares for 44.78
STO Oct 45 SC for 3


Cost : 41.78

PE: Let the short call goes ITM and call out by Oct and make 7.4 percent in about 7 weeks.

SE: As you can see, I am not very bullish on the stock. I believe any bounce will be short term but the support at 42 should hold.

I am not easy about September and Oct for the overall stock market. Thus, I am using a 2 months SC instead of 1 month. A 1 month SC should actually do fine too.

If stock goes below $42, I will roll the SC down to ITM to reduce my cost to around 38.

If the stock cannot maintain support at around $38, I will close the trade at a slight loss, or double up the shares or add a put. It will depend on the market situation at that time. If the environment is bullish and RIMM shows no signs of fundamental breakdowns, I will add to the shares. If not sure, I will add a put to make it a collar and continue to trade until I make money.

If the stock shows fundamental flaws, I will exit the trade with a small loss.