I want you to notice that the key word in the title of this article is "trading". For those who have followed my previous articles with regards to BlackBerry (BBRY), you will recall that I have been investing and trading in the stock. This has been done while attempting to use the volatility in the stock price movement to my advantage. At the same time, I would not deem my strategy to be one best suited for a long term investor. If you have ultimate conviction in the future performance of a company, you arguably should buy the stock outright. The strategy I have been utilizing would limit my gains if the stock exploded higher in a short period of time. However, if you believe as I do that the stock will be range bound in the near term, you can utilize a trading strategy to generate income or lower your basis in the stock over time. My strategy has involved a combination of selling options and owning the stock as detailed in my previous article. In my opinion, nothing has fundamentally changed with the company in the last 14 days. On April 2nd, when I last reported on BlackBerry, the volatility in the stock was still on a post earnings report high. Since then, the stock has for the most part, meandered slightly lower. The chart below shows the price action between April 2nd when I sold covered calls on BlackBerry and the closing price on April 16th:
For those currently invested in BlackBerry, this is a time where if you believe as I do that the fundamental story has not changed in the last two weeks, you should sit tight and wait for the next catalyst. If you are trading BlackBerry without the intent to hold the stock for the long term, the present situation offers a slightly different outlook.
Bye-Bye BlackBerry Volatility - For Now
Anyone who has ever bought call or put options on a stock realizes that a range bound stock could lead to a complete loss on that option trade. When you outright buy stock options, you are generally looking for the stock whose options you now own, to have a sharp move in a relatively short period of time. The advantage to buying options is that you might just hit the jackpot and your potential gains are virtually unlimited. At the same time, you are as or more likely, to have your options expire worthless and lose your entire investment.
The last two weeks of price action in BlackBerry have played out favorable for anyone who sold covered call options on their BlackBerry stock shortly after earnings. As the stock has remained relatively range bound, the volatility has plummeted in the underlying option prices. The table below compares the stock and option prices as of April 2nd with the closing price as of April 16th. The option shown is the stock option I previously sold in my covered call trade on April 2nd.
Hopefully, the key figures in the table will jump out at you. In the time frame shown, the stock price has fallen close to 9%. However, the price of the $18 call option has fallen about 62%. As an investor in BlackBerry, I am not thrilled that the stock has dropped by 9% in the last few weeks. Thankfully, I also have been a trader as well as an investor, and have profited on the decline in the price of the call option I previously sold.
Prior to the close of trading on April 16th, I repurchased the $18 call options for $.35 that I had previously sold for $.90 on April 2nd. Excluding trading costs and taxes, this was effectively a 3% gain in two weeks ($.55 gain / $18 = 3%). While my investment in BlackBerry has declined by almost 9%, my trade produced a gain of 3%. Thus, I have an effective loss of 6%. This compares to those who simply were investing in the stock and have a 9% loss during the same period of time.
The detail above illustrates the potential offered by being both an investor and a trader. I believe there is a significant distinction between the two. However, combined they can complement your portfolio by potentially limiting losses or capitalizing on spikes in volatility that are temporary in nature.
The Next Move For Both The Investor And The Trader
As an investor, I continue to wait for the BlackBerry story to unfold. This investment presents, in some manner, a hiding spot from any turbulence that might come from an overall market correction. BlackBerry trades at a valuation of $7B today based solely on company specific concerns. If those concerns begin to dissipate, the stock should rise even if the broader market is correcting from its recent all time high. Conversely, if just the same concerns dogging the company today linger, a market wide correction should impact BlackBerry less than other stocks that will fall in concert with the market. It will take a black swan type event to alter the strength of the balance sheet currently enjoyed by BlackBerry. The company has a cash balance of $2.9B which is equivalent to about 40% of their current market capitalization. They also have zero debt. As an investor, I take complete solace in this fact. Unless the company has invested all of their cash in Cyprus bonds, nothing in the near term will occur to impact the safety net their cash balance offers in investing in the company.
As a trader, I await the next volatile event. It could be tomorrow, next week, or next month. The beauty is that I do not necessarily care when it occurs. Thanks to the recent drop in volatility, I own my shares free and clear after buying back the covered calls I previously sold. Between the upcoming launch of the keyboard Q10 model phone, updated analyst estimates on the company, and rumors regarding future phone models to come, I have no doubt that volatility will return. Until that time, I enjoy simply being an investor in the stock and await the return of volatility when I will again become a trader.