In my previous article before the release of BlackBerry (NASDAQ:BBRY) earnings, I advocated taking advantage of the volatility in the stock through selling short term put options. To recap that trade, I sold the March 28th $15 weekly put options, about a week before their expiration. I collected $1.10 in proceeds from the this trade. The premium was on fire when I sold the put options because of a large intraday reversal in the stock. This was mainly due to some negative analyst commentary along with the upcoming earnings release. The stock closed at $14.45 after earnings were released on March 28th. As the stock closed below the price at which I sold the put options, I had the stock "put" to me and I effectively owned BlackBerry common stock at the close of that trading day. My basis in the stock became $13.90 which reflected the strike price of $15 a share, reduced by the $1.10 in premium I previously collected through the put option sale. There are catalysts on the horizon that could cause BlackBerry shares to move higher, lower, or to continue to trade range bound. My opinion is that the BlackBerry story will play out over many more months and will not be resolved in the near term. With that in mind, I again intend to take advantage of the volatility in the stock by now selling call options against the position I own.
Selling Covered Call Options To Produce Income
By selling covered call options, I am in essence creating a dividend stream of income from my holding of BlackBerry shares. I don't mean to confuse the sale of a covered call option with a dividend as there are vast differences. The tax rate on gains from dividend income will be lower than that of gains from selling covered calls, for example. However, the concept is similar as I am creating an income stream to be generated while holding the stock. With the particular example, detailed below, I have the potential to earn substantial upside if the stock continues to move higher over the next 75 days or so. At the same time, should the stock move lower, I collect the premium from the covered call options thus lowering my basis in the stock.
Why This Strategy Makes Sense For BlackBerry
There are times when selling covered call options against stock you own makes a lot of sense and other times where it does not. In the case of BlackBerry, my conviction is that the stock will be range bound throughout 2013. Confusion could be rampant with mixed messages on the success of the new BlackBerry 10 phones, questions about the decreasing subscriber base, and in general both the bull and bear camp continuing to make BlackBerry a battleground stock. At the same time, the balance sheet for BlackBerry is actually getting stronger each quarter as proven by this last earnings release. The strength of the balance sheet provides a floor in the stock price for the near term. This floor that exists because of a strong balance sheet provides the conviction to make to make this type of trade. Stocks are generally volatile for a reason, which generally entails that substantial downside risk is present. My conviction in the strength of the BlackBerry balance sheet is what gives me comfort in making this trade.
This morning I sold covered call options at the $18 strike price that expire June 22, 2013. The premium I collected was $.90 for the options I sold. This now effectively lowers my basis in the stock to $13 per share. I chose the June expiration month for a number of different reasons. Between now and June, the company will release their next BlackBerry 10 phone, the Q10 Qwerty keyboard model. In addition, the next earnings release will most likely occur the week after the options I sold expire. This allows me to own my shares, unencumbered by the call options that expire prior to earnings, and to formulate a new trading strategy heading into the earnings release.
By collecting the $.90 in premium, I am effectively generating a 6% return in less than 3 months. This is why I enjoy this type of trade and reference it as an income producing strategy. It is an opportunistic trade when you own a stock that is highly volatile but that you believe will be range bound. In the event that the stock were to fall, my basis has been lowered. If the stock fell significantly in a short time period, I would also most likely buy back the call options I sold at a significantly lower price than I paid. I then have the ability to set up a new covered call trade further lowering my basis in the stock.
For those who believe the stock is going to $100 a share by the end of June, this is not a trade you want to make. While I personally will be content if the stock is over $18 when the options expire, my upside is limited. At the same time, with my basis now at $13 a share, were the stock to reach $18 by the June 22nd expiration date I would have earned a 28% return in less than 4 months. I would take that to the bank every day of the week.
Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Long BBRY common stock. Additionally, I have sold covered call options against my long position as detailed in the article.