Saturday, October 06, 2007

A Trade on Research in Motion (RIMM)

Dear fellow options traders :

If you have been trading options for earnings gapping announcement for a while, you would have known that Research in Motion (RIMM) would be reporting earnings on 4 Oct 2007 after-market-close.

Research in Motion (RIMM), maker of the BlackBerry Pearl and Curve Smartphones, gapped up almost 30 points back in 29 June 2007 when the company reported a mind-bowing Q1 earnings quarter with upside guidance topped with a 3 for 1 stock splits announcement.

RIMM made an impressive move of almost +$20.00 to touch $100.00 on 4 Oct 2007 since its post stocks-split day on 20 Aug 2007. Obviously, expectations have been running high towards another knockout Q2 quarter & upside guidance from RIMM and this is reflected in their expensive stock options, stuffed with rich, creamy fillings of high implied volatility.

I expected RIMM's stock price to run up higher towards the eve of earnings based on the past 2 months of research analysts' upgrades. Thus I paper traded a Oct 100 Call at $565.00 a contract on 3 Oct 2007 when RIMM was trading around $96.30. On 4 Oct 2007, eve of earnings announcement, RIMM went up intra-day around +$4.00 to touch $100.00. Since the position I bought had already earned $175 (excluding commissions) by 3.55pm EST, I decided to close the position without carrying the trade till earnings announcement.

My decisions for letting go of the position with a profit before earnings announcement were :-

1) Although there were a couple of research analysts' upgrades during the past 2 months, there were 2 research analysts' downgrades on 1 & 2 Oct 2007 respectively.

2) I noticed the piling up of the near ITM & OTM put options volume in comparison of the call option volume in the last trading hour and was a little concerned that the stock might not gap up after earnings.

On 4 Oct 2007, Research in Motion (RIMM) reported in-line Q2 (Aug) earnings of $0.50 per share and revenues rose 26.8% year/year to $1.37 bln vs the $1.36 bln consensus. But the Co. issued upside guidance for Q3, expecting EPS of $0.59-0.63 vs. $0.55 consensus and Q3 revenues of $1.60-1.67 bln vs. $1.52 bln consensus. Subscriber account additions in Q3 are also expected to be approximately 1.65 million.

Alas, on 5 Oct 2007, RIMM gapped up +$7.70 to $107.60. The Oct 100 Call closed at $13.95 on 5 Oct 2007, rising a total of about +$5.80 intra-day.

Yours Truly,

Tony Chai
Options Trading Resources


Sherwin said...


Thank you for dropping by mine. I like your analysis.

I'll add you to my links. I have trader friends who also trade the US Markets.

More power to you!


Blaine561 said...

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Tony Chai said...

Hi Blaine561 :

Thanks for your comments.

You can check out my review of the Options University 101 Home study course at this link in my blog.

Good Luck!!

Yours Truly,

Tony Chai
My Options Trading Blog