On Monday shares of Research in Motion broke early morning highs around 2:20pm, and volume began to really pick up just after 3pm, shares then climbed from $50.50 to close near $54. A member of my premium product noticed the move early and provided the alert to members in the chat room, and I reached out to my contacts and discovered that RIMM was unveiling it's "Playbook" tablet at an Adobe (ADBE) Conference. We saw the move, and knew the catalyst well before any news services picked up on the activity.
The options activity gave further confidence that this move was for real, and there was a lot of upside potential.
On an average day RIMM trades 50,000 calls and 40,000 puts, one of the more active names in options. On Monday, RIMM traded 105,000 calls and 50,000 puts, but even more impressive was the movement in the implied volatility, and the skew structure as far out of the money calls at the $55, $57.50 and $60 calls saw traders aggressively paying the offer to take part in this move, and implied volatility is RIMM jumped 28% on the day, a kind of move generally only seen ahead of a takeover or other major catalyst to send shares higher.
The largest trade on Monday came early in the move , a buyer of 6,200 November $52.50 calls at the $1.15 offer on the ISE (trading at $3.60 currently, more than a $1.5 million gain in 1 day). This large trade was the signal to get involved, and I prefer the further OTM calls when you know IV is about to be pushed higher, because the gains are for a larger percentage, as the cheap calls gain on both the move higher in the stock price, and the volatility being bid higher with speculators. My choice was the November $55 calls at $0.85 (Reached $3.45 today as RIMM shares touched the 200 day EMA, a 300% Gain).
On Tuesday the action continued, as 219,759 calls and 107,443 puts traded, well above average daily volumes. The action started very early (Shares were also boosted on reports that India may give RIMM more time for a solution to a security issue.) with a block buyer of 10,000 Janaury 2012 $90 calls at the $0.95 offer (Posted Trade Live on Twitter to Followers), a trade that is looking for shares to gain around 75% over the next 1 year and 3 months. At 10:41am 2 blocks of 5,000 November $55 calls were bought, 1 block of 5,000 November $60 calls was bought, and 1 block of 5,000 November $50 calls was bought. Where the action was is even more surprising as 34,220 November $55 calls, 20,416 November $57.50 calls, 25,988 November $60 calls, and even 18,412 November $65 calls traded, noting that the $65 calls would require shares to gain another 20% within 3 weeks.
The Chart Below Illustrates the Timing of the Option Buys with the 2 Day RIMM Chart:
This is another clear example of how when options action combines with price action, and has a catalyst to justify the move along the the fundamentals and the technical analysis, explosive gains can be made in the matter of minutes, hours, or days when trading options.
My new scan I run every 10 minutes during the trading day for Hot Options Action, seeking out the volume trades along with volatility movements, is going to lead to many more of these opportunities going forward.
On a side note, looking at the longer term view of RIMM i would note that this was the perfect set-up, a falling wedge that broke out on volume at $50, similar to a chart I posted on Twitter regarding Visa (V) when it broke a falling wedge at $71.50 (now trading $80 less than 1 month later), a significant technical reversal move:
Shares of RIMM were beaten down and trade at 8.8X earnings, PEG of 0.79, and 10.8X free cash flow, a clear value at these levels and attractive as a takeover target, potentially for Microsoft or even Cisco. With the coming launch of a new product, even if it is not a real threat to the iPad, it is still a move in the right direction, continuing to innovate and not giving up the good fight with Apple.
Shares could pullback some after this most recent surge, but this was a complete trend shift, and I would target a move to $60 within the next 3 weeks.
If you are looking for a high reward/risk trade in RIMM the November $55/$60$/$65 Butterfly Call Spread Trades for $0.97, basically profitable between $56 and $64 for shares with max profits at $60. The trade can also benefit if rumors are squashed and IV comes back down. The trade view is below:
There are many great ways trade RIMM from here, but I figured this is one way with a nice P/L profile.
I felt it was necessary to give a view of how crazy the options trading in RIMM has been the past 2 days, and hopefully it provided some value.
One Quick Addition - A view of RIMM Implied Volatility since Sep. 1; IV 30 in Red, IV 60 in Yellow, and IV 180 in Orange with HV 30/60 in Light Blue/Dark Blue; Notice the Spike of IV 30 the last two days (Red)
Thanks
Joe
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