Wednesday, April 14, 2010

RIMM Options on Sale?

Though S&P options remain overpriced versus realized volatility, there are a few spots where implied volatility has come in enough to make buying options somewhat attractive. One such candidate is RIMM. Following its earnings announcement about two weeks ago, implied vol has dropped precipitously to around 30%. In finding evidence that options are cheap we could point out that this is a 52 week low in implied volatility, but truth is that's not saying much. Just about all options these days are seeing vol at 52 week lows. What is more noteworthy in RIMM's case is the fact that implied vol is right in-line or perhaps a tad low when compared to realized volatility.

Now to be fair, the earnings gap is still in the calculation of 20 day HV displayed below. As a result it's skewed higher than what it would be without the gap. However, excluding the gap, you're still looking at realized vol around 30% which is in-line with current option prices (click image to enlarge).
[Source: Livevol Pro]

Yet another sign that options are getting more attractive for buyers is the cyclical nature of RIMM volatility as seen over the past few earnings announcements. Usual within about a few weeks to a month following earnings, volatility has had a tendency to bottom.

Lest you think bottom fishing in volatility is a walk in the park, take a look at Adam Warner's write up regarding the fight between time decay and adequate price movement.

For related posts, readers are encouraged to check out:
The Tempest and Volatility Analysis
The Cycle of Implied Volatility

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