Research In Motion Limited ( RIMM ) has come under considerable fire lately, due to reports that several countries, including Saudi Arabia and the United Arab Emirates , are considering banning the company's best-selling BlackBerry smartphone. For its part, the stock has plunged nearly 25% so far this year, placing additional pressure on bullish RIMM investors. Today, the stock breached key short-term support in the $52.50 region, prompting at least one options trader to bet on a steep decline through September expiration.
Digging into RIMM's options activity, I ran across a block of 160 September 50 puts, marked "spread," which traded on the Chicago Board Options Exchange ( CBOE ) at 11:03 a.m. for the bid price of $2.54, or $254 per contract, indicating that the contracts were most likely sold to open.
The second leg of this position was found on the September 52.50 put, as a block of 160 contracts traded at the same time on the same exchange for the ask price of $3.74, or $374 per contract. This block, too, was marked "spread." Given this data, we could be looking at the initiation of a vertical put spread, or a debit spread , on Research In Motion Limited.
The Anatomy of a Research In Motion Limited Vertical Put Spread
Breaking down this vertical put spread, the trader would have purchased 160 September 52.50 puts for a total outlay of $59,840 -- (3.74 * 100) * 160 = $59,840. Minus the sold leg of the debit spread, RIMM would need to fall about 8.7%, from Friday's close of $53.40 in order for the position to reach breakeven at expiration. Furthermore, the maximum loss on this position is limited to the initial investment of $59,840.
However, the second leg of the debit spread helps to offset the cost of the overall position. Specifically, the trader sold 160 September 50 puts for a total credit of $40,640 -- (2.54 * 100) * 160 = $40,640. Combining this leg of the trade with the purchased September 52.50 put lowers the total cost of the entire position to $19,200 -- $59,840 - $40,640 = $19,200.
The addition of the sold September 50 put also lowers breakeven on the trade. To arrive at breakeven, we subtract the credit received from the sold September 50 put from the debit incurred by purchasing the September 52.50 put. Doing so, we arrive at a cost of $1.20 - $3.74 - $2.54 = $1.20 -- or $120 per contract. As a result, breakeven for the position now rests at $51.30 per share, meaning that the trader is already sitting on a profit with RIMM last seen down 4.09% at $51.22 per share.
The maximum profit on the combined legs of the long vertical put spread is calculated by subtracting the total debit paid from the difference between the sold September 50 strike and the purchased September 52.50 strike. In this case, the maximum profit is $1.30 -- (52.50 - 50) - 1.20 = $1.30 -- and is reached if RIMM drops to $50 per share when the options expire. Below is a chart for a rough visual representation of the trade's profit/loss scenario:
After the vertical put spread has been entered, increasing implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. At the time of the trade, implieds for the September 50 put were 52.59%, while the implied volatility for the September 52.50 put was 51.04%. For comparison, RIMM's one-month historical volatility was perched at 47.34% as of the close on Friday.
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