Following a worse-than-expected earnings guidance from Nokia Corp. (NYSE: NOK ) , shares of Research in Motion Ltd. (NASDAQ: RIMM ) are edging down on the day and underperforming the broad-market gains. However, it looks like at least one investor is willing to risk premium to bet on longer-term upside and call for the stock to jump by almost half of its current value.
RIMM has dropped more than 1%, or 83 cents, to $61.96 during afternoon trading despite a note from Merriman that said NOK could be losing share to competitors such as RIMM. The company did not announce any news today, but its earnings announcement is due on June 24 (analysts estimate earnings of $1.34 per share). The January 2011 85-strike calls were active earlier during Wednesday's session, and the action appears bullish.
Before we analyze the options action, be sure to have your free
Around 10 a.m. EST, a block of roughly 7,000 out-of-the-money (OTM) January 85 calls changed hands for $1.45 per contract outright, meaning the investor did not tie this options volume to a stock position. These calls are home to current open interest of more than 10,000 contracts, indicating the investor could have bought to close a short call position. However, judging from the implied volatility and expiration date of these calls, we believe the volume consisted of long calls trading to open and will analyze it as such.
Implied volatility of these longer-dated calls is 38% compared to the stock's 30-day historical volatility of 44%. These calls have an 18-delta, indicating the price of the calls should move by 18 cents in relation to a $1-move in the stock. These OTM calls have climbed eight cents so far on the day despite a decline in the stock.
This call buyer will make money if RIMM shares are trading higher than $86.45 at January 2011 options expiration. If RIMM shares rally at least 39% during the next several months, this investor could theoretically make unlimited profits as the stock continues to the upside. If RIMM shares are still trading lower than the breakeven price at January 2011 options expiration, this long call position caps maximum loss at the premium paid, or $1.45 per contract.
RIMM reached a 52-week high of $88 in September 2009, and it's interesting that today's options action suggests one investor expects the stock to soar higher and be trading close to or above its highs during the next seven months.