Is RIMM the Next BBY?

Shares of Best Buy are getting smoked after it reported the quarter this morning. Research in Motion's implied volatility is behaving the same as Best Buy's into earnings, and I think because of that and other reasons, we may see some of the same action after BlackBerry's maker reports.
By Mark Sebastian ,

On Thursday after the market closes,

Research in Motion

(RIMM)

is expected to report its quarterly earnings. In the past, the stock has had a somewhat steady profile. Whether the stock moves big or small, the implied volatility of the options has run up significantly. Typically, 30-day implied volatility peaks around 60% rallying all the way up to the announcement. What is throwing me for a loop is that the opposite is actually happening in RIMM. As the company heads into earnings, 30-day implied volatility is at about the same level it normally would be after an earnings announcement. The causes could be any of the following. Traders are waiting to see RIMM's answer to the

Apple

(AAPL) - Get Report

iPad: the 'PlayBook', almost nothing happened in the last earnings cycle or it could be due to overall market volatility being near its lowest level in the last two years (at least in the SPX). Heck, maybe there's just a good feeling about the stock.

Regardless of the way the market is treating this cycle, I am having a hard time buying it. I have trouble believing that a company as troubled as RIMM will see no action on its earnings. The market can be wrong on these announcements. In fact, many of the biggest moves happen when implied volatility doesn't rally into an announcement (of course the biggest thuds do as well). For example, Best Buy (BBY) - Get Report is getting smoked today, down about 15% at ~1:30 p.m. EST. In the days leading up to today's announcement, BBY implied volatility rallied less than 4% and we are not even at its high for the month, let alone one of its earnings cycle.

I would not be shocked if we saw something similar in RIMM as we saw in BBY. Both companies have a great past and a somewhat questionable future. Both companies have rallied for several months leading into these earnings announcements. Neither saw a big pop in implied volatility heading into the quarterly report (although RIMM has some time).

Looking at paper flow, I think smartly, most of the bigger trades have not been premium sales. Of those that have been sales, almost all of them have appeared to be bearish in the form of call sales. With December coming off the board and January really cheap, I think there is some real opportunity to swoop in on a purchase on what seems to be some inexpensive premium. With RIMM trading $61.10, the January 60/62.5 strangle can be bought for about $5.55. This would give the stock more than 30 days to move about 9%. RIMM has moved more than that when there wasn't an earnings cycle on the horizon.

If I am lucky, the strangle will get bid up over the next few days and I can sell it at $6.00 or more. If this doesn't happen, I would not be shocked to see RIMM move at least 5%-10% after its earnings, which should be enough to make this spread profitable. If earnings go the market's way and are a big thud, the potential implied volatility implosion could be about 6%, which would be a loss of about 20% of the value of the strangle.

Trades: With RIMM trading $61.10, buy to open RIMM January 60 puts for $2.83 and buy to open RIMM January 62.5 calls for $2.72.

The net buy is a RIMM January 60/62.5 strangle for $5.55.

At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned.

Mark Sebastian is COO and Director of Education for Option Pit Option Mentoring. Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He started the popular blog Option911, which is now the Option Pit blog. Sebastian has been published nationally on Yahoo! Finance, is a featured contributor for TheStreet's OptionsProfits, SFO, OptionsZone and is the managing editor for Expiring Monthly: The Option Traders Journal. Mark has a Bachelor's in Science from Villanova University

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