Thursday, September 24, 2009

A Look at RIMM Earnings

Like last quarter's earnings, RIMM has a noteable pop in implied volatility going into its earnings announcement. As mentioned in the Volatility Crush post linked to yesterday, option premiums get bid up in anticipation of the earnings announcement causing a lift in implied volatility. As traders are purchasing calls or puts, they willingly bid up or pay more for these options as they *know* the stock will gap one way or another in reaction to the earnings announcement. Thus, they hope they will be compensated for paying up for these options by a large favorable gap in the underlying.

With 30 day HV currently at 26% and 10 day HV even lower at a measly 18%, recent realized volatility is rather low. IVolatility's Index Mean is at 56%, displaying an obvious premium and expectation of increased volatility in the underlying stock price going forward (click on image to enlarge).

[Source: IVolatility]

As mentioned in previous earnings plays, if you believe IV is too high then you'd be a seller of options. Conversely, if you think it's too cheap and we're actually going to see a larger move than is expected, then you'd be a buyer. Unless you want to take a directional bet, most traders looking to play volatility (long or short) will use a delta neutral play such as a strangle or iron condor.

OCT 75-95 Strangle
With RIMM currently trading around $84, one potential play would be to sell an OTM call and put. Let's take a look at selling the Oct 75 put and Oct 95 call for a combined credit of $3.30.

[Source: EduTrader]

As you can see the trade is profitable at expiration as long as RIMM stays between 71.70 and 98.30. If you're uncomfortable or don't have the trading permission to sell naked options, you could consider entering an iron condor instead.

For another take on RIMM earnings check out Adam's post over at Daily Options Report.


semuren said...

what about using a double calendar or a straddle strangle swap (short front month straddle, long back month strangle) on the theory that relative IV crush in the front month will be way more than in the back month?

Anonymous said...

Good Post

Tyler Craig said...


Yeah, that's another legit strategy some traders use into earnings. I've never really played dbl diags much into earnings. A short front month strangle is the simplest delta neutral, short vol strategy, so it's usually the one I default to. The one nice thing about the dbl diagonal you're referencing is it has less theoretical risk.

So if RIMM is dead in the water after earnings, the short strangle will probably be more rewarding. On the other hand if it moves a ton, then the dbl diagonal will probably win out.

Tyler Craig said...

Thanks Anon-

Justin said...

I ended up selling a NOV 65/105 strangle for 2.19 credit. I know the strikes seem far apart but I'm just trying to play it relatively safe, and hope the crush does it's job.

Tyler Craig said...


Given that RIMM is taking if on the chin after hours (trading around $75 right now), you'll probably be glad you went out an extra strike or two.

The OCt 75-95 strangle is probably a bust. We'll see if volatility comes in enough to stem the bleeding that's going to occur b/c of this large move down.

Justin said...

Stock gapped way down and opened at $70.48 so I immediately bought back the call for a dime, a 1100% gain on that side. Now to wait for it to fill in so I can cash in the put.

Tyler Craig said...

Given that i was short the 75 put, I went ahead and closed the trade this AM. With the volatility crush, the loss wasn't as bad as I thought it would be.

Justin said...

Look at an intraday chart, like the 5 min-what's the deal with $70? It's as if that's what "they" were aiming for. I'm watching it in case it breaks much below that, then I'll get out of the 65.