Saturday, June 20, 2009

RIMM Follow Up

Thursday's post highlighted a few potential earnings plays for RIMM earnings. Let's see how they would have played out.

On Thursday RIMM closed @ $76.55. The initial knee jerk reaction to RIMM earnings announcement was a quick selloff in the after hours market towards around $72, following which it traded back up towards $76 where it opened on Friday. All in all, the reaction to the announcement caused RIMM to gap down a measly $.60 ($76.55 - $75.95) between Thursday's close and Friday's open. Quite an underwhelming reaction to say the least! The obvious winner would have been short volatility strategies such as the 65-70-85-90 iron condor we mentioned. Although the condor was trading at $1.70 credit on Thursday, on Friday the call & put spread could have closed out for around $.02 or $.03 apiece. I would have most definately closed the spread immediately at the opening to lock in almost 100% of the potential reward. Holding until the end of day to eke out the last few pennies of gain would not have been wise as RIMM could have traded down below $70.

The obvious loser would have been the straddle purchase. The straddle needed RIMM to gap at least 10% just to breakeven. Even had you held the straddle until the end of day, with RIMM closing at $72.76, the 75-80 strangle would have only been worth $2.24 at expiration. Since it was purchased for $5.75, it would have suffered a 61% loss.

RIMM's rise in IV and ensuing IV crush following earnings serves as a prime example of how the options market anticipates and reacts to the gap that typically follows every companies earnings announcement. The trick to playing earnings is to consistently gauge whether or not options are overpricing or underpricing the increase in the underlying stocks volatility. A feat easier said than done!

This go around RIMM's reaction was no doubt applauded by volatility sellers while being cursed by volatility buyers.



1option said...

I watched RIMM selloff immediately after the close Thursday, only to see buyers push it back up before the open Friday.
Quite interesting turn of events as RIMM is usually a big mover one way or the other after earnings.
DeltaStrike opened a Double Diag. that turned out to be a dud but he was able to avoid any losses atleast.

Tyler Craig said...


Yeah, I saw his trade overview on the dbl diagonal. Had we moved a little more it probably would have been profitable. It usually comes down to how big of a pop in the stock price you get. Because RIMM was absolutely dead, the IC would have been the better play. Only trick is knowing that before hand :)


Tim Justice said...

LOVED the volatility crash!

Short straddle baby!

Tyler Craig said...

yeah, you nailed it with the short straddle. No Gap + Vol Crush = Printing press & a happy Tim.