RIMM Options Look Cheap, But It's Tough to Pull the Trigger

Following up Todd's earlier post referencing Research In Motion (RIMM), incidentally, I think we're heading into yet another scenario where the options market is underestimating the potential post-earnings move, which has been typical of controversial stocks this year (Facebook (FB), Netflix (NFLX), Zynga (ZNGA) Green Mountain Coffee (GMCR), etc.)

Let's lay out the look of the land.

RIMM is down 91% since its 2009 high as a result of market-share losses and declining sales at the hands of Apple (AAPL) and Google (GOOG) Android.

As of the time I've writing this, the stock's run up 111% since its September low at $6.22 due to buzz on the upcoming Blackberry 10 operating system, which shows significant promise in terms of quality and usability. Leaked photos and videos of one of the upcoming BB10 phones are certainly helping the cause this week.

That aforementioned buzz has helped drive a big short squeeze (short interest is 27% of the float) as expectations went from pathetically low to 'hey, they just might pull something off!'

Now let me make one thing clear: as it stands now, the only I opinion I have regarding BB10 is that no one knows how well it's going to perform out in the real world. Regardless of how good BB10 is, there's still no telling how things will go in the real world upon release in late January.

Here are some of the factors we have to consider:

1) How many people are willing to wait through the discount-filled holiday season (I even get regular discount offers on iPhone 5) to get a new Blackberry?

2) Will the mobile carriers, eager for a third O/S supplier, push BB10 hard?

3) Will BB10 bring former users away from Apple/Android?

4) Has the doubling of the stock already priced in too much success?

To me, it adds up to a mountain of uncertainty.

As it stands now, the $13 straddle for the December expiration (expiration is one day after the December 20 Q3 earnings report costs about $1.55, implying a roughly 11.7% move off the current stock price.

Since the $13.20 stock price isn't directly on the strike, breakeven comes on a 13.3% downside move to $11.45, or on a 9.3% move up to $14.55.

Initially, I was eyeballing the straddles, but while taking another look, the call options look very, very cheap, despite the ~90% implied volatility readings you see for the December strikes.

If the company comes out bullish on Blackberry 10, the short squeeze probably has plenty of room to rage on. Right now, the December $13 call is going for about $0.87. Meaning, to break even, the stock would have to rise about 5% from current levels. That seems pretty darn reasonable to me! Alternately, the $13-14 call spread is going for about $0.40, for a breakeven of $13.40 and a max profit of $0.60 if RIMM hits $14.

Now again, I don't know what RIMM's going to have to say when it reports on December 20 -- it just seems that the odds favor a huge move that the options market is perhaps not grasping. For now, I am leaning towards taking a small chunk of $13-$14 call spreads, but I haven't placed any orders because I'm still struggling with the negative side of the equation.

I can't decide what will happen if investors are underwhelmed by RIMM's outlook for Blackberry 10 -- will they give the company a pass until the full unveiling? Or will it drive profit taking and serious downward momentum?

Oh well -- I've got a week to decide where I'm going with this.