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