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Polishing the RIMM


recent column in which I suggested buying a January straddle in

Research In Motion


generated a fair amount of email, and surprisingly only one person called me a moron for espousing a straddle. There was still plenty of sharing about a better approach and all, but the beautiful thing about options is you can skin them to taste. Here are just a few of the great comments I received that allow me to expand the limitless, multifaceted topic of a dynamic options strategy.

The only problem with your hypothesis is no one knows when the event is, and by the time anyone finds out, it'll be too late, especially with options where there is no after-hours trading.

-- T.V.

Implicit in the suggestion of using January options is that while the decision could potentially be handed down "any day," the actual date remains very much unknown. It could easily come after next Friday's November expiration but may not be delivered until after the new year. The main point being that the implied volatility will work higher as the impending court decision approaches, which means every day that passes without a decision should see a tick up in implied volatility as the tension mounts.

Also, remember that although the January options cost more in absolute terms, their implied volatility, at 65%, is some 10 percentage points below the current front month (November). I am assuming there will be no decision before Nov. 19. In that case we will see the skew shift to where December is the front month, and those options will carry a higher implied volatility than January or later months. Owners of the January options are now in position to take advantage of this skew by legging into a diagonal calendar spread as I described in the earlier article.

One item that several readers clarified for me is that if RIMM wins, it still does not get the "immediate cash windfall" of the royalty, which has been set aside, as there is likely to be an appeal from privately held


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. So the ultimate resolution could be two to three years away. Still, a continued stay or removal of the injunction barring sales in the U.S. could provide a huge lift to the shares.

I'm not sure why it matters that options don't trade after hours? If you think you are missing something, just trade the stock to lock in the option gains. Otherwise, wait until morning. If there is truly a big move, it will hold until the regular trading session and you can make your move then, when there is a more liquid and fairly priced market.

I was wondering why you would not go way out of the money on RIMM and make the big bucks? Maybe $30 puts and $120 calls. Wouldn't this make more sense if RIMM is going to move big? I understand it's much more risk, but no risk no reward. If RIMM loses the ability to sell in the U.S. wouldn't you agree it's a $20 stock?

-- R.P.

The risk is actually not as great. The actual cost is lower but the probability of a positive return is greatly diminished. Yes, it's true, a lower-cost ticket actually offers higher odds. The break-evens are so far from the current price that it has really become a one-dimensional trade. Such a wide straddle does not supply sufficient leverage, or the nice smile that a position with a positive gamma supplies, to allow for trading against it. You are simply waiting for an earth-rattling decision rather than establishing a position that carries limited risk but unlimited reward. The straddle, with its higher delta and closer break-even points, affords more opportunity to either trade around relatively small short-term price movements or benefit from a marginal increase in implied volatility than does a wide straddle position.

When, Can, and Should I Trade Options

Are options always tradeable? In other words can I get stuck holding put contracts, when they are way, way in the money. Will there always be a market?

-- C.P.

You should never get stuck holding an in-the-money option. At worst you can exercise it and liquidate the stock position. There is always a market for options (or anything for that matter), the question is at what price? Deep in-the-money options are easy to value, because they consist mainly of intrinsic value. Obviously, the market for deep in-the-money options will not be as active as at- or out-of-the-money strikes because they offer substantially less leverage.

The only obstacle to trading deep in-the-money options is that you are unlikely to be awarded a price that you deem fair. As the seller, you likely will be selling at par, or a value barely above the intrinsic worth.

But as a buyer you will likely have to pay a premium beyond both the intrinsic and theoretical "fair" value. (Market-makers have costs of business and families to feed.) If the price is below intrinsic or seems excessively above fair value, just use the cash stock market to offset the position and tell the specialist to put his outstretched hand back in his smock.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to