Prepare To Profit From BlackBerry Q1 2014 Earnings

| About: BlackBerry Ltd. (BBRY)

In what has become one of the must watch events each earnings season, BlackBerry (NASDAQ:BBRY) has its next date with destiny scheduled for June 28th when the company will report its Q1 2014 earnings. The story will again focus on the continued success of the BlackBerry 10 phone launch, with this quarter specifically representing the first full quarter of sales for the Z10 model phone. Investors will also get a read through as to how well the just released Q10 model fared in its debut, and an updated look at how sustainable the service fee revenue stream will be in comparing the level from Q1 2014 to the prior quarter.

This continues to be a volatile battleground stock, but it certainly feels as if the news flow has seen a noticeable shift towards positive coverage of BlackBerry recently. The occasional hit piece still comes out from the analyst community, but you are more likely to see an analyst project a cautiously optimistic outlook instead of a "Debbie Downer" point of view. Even in light of a shift in sentiment towards a more positive outlook on the company, I still feel investors need to approach BlackBerry with guarded optimism. You do yourself and your portfolio a disservice if you blindly invest in the company with rock solid faith that the stock is guaranteed to move higher. The reality is look where the stock is today, compared to where it was after its last earnings report on March 28th. The proximity in the stock price to where it was about 75 days ago is a bit crazy. BlackBerry closed at $14.44 this past Friday, June 14th, and the image below shows the trading history for BlackBerry around its last earnings date of March 28th:

Click to enlarge

Your eyes are not deceiving you. BlackBerry closed this past Friday $.01 below where it closed on March 28th after its last earnings report. Since the last earnings report, the stock has traded in a range from about $13.50 to almost $16.50, as seen below:

BBRY ChartBBRY data by YCharts

The trading action makes for frustration if you are long the stock waiting for the ultimate breakout to come. For this reason, I continue to advocate using additional strategies to generate income from BlackBerry while waiting for the ultimate shakeout to occur. The onset of earnings presents the gift that keeps on giving, as investors position for a sharp move in the stock while volatility in the price of the underlying options for BlackBerry moves higher in concert. This presents the quarterly opportunity to generate income around the earnings release, or build a position in BlackBerry at a lower price if the stock were to move lower after earnings.

Investors who believe in BlackBerry should consider selling the put options that expire July 5th, exactly one week after BlackBerry reports earnings. Specifically, I would target the $14 strike price which as of the market close on June 14th paid a premium of $.83. This trade is appealing for oh so many reasons if you believe in BlackBerry. If you sell the July 5th $14 put option, you are obligating yourself to purchase BlackBerry stock at $14 if the stock is below that price when the options expire (on July 5th). In return for taking on this risk, you are getting paid $.83 in premium for each option contract you sell. This is the equivalent of a 5.9% return on your investment ($.83/$14 = 5.9%).

One of two different scenarios can happen when July 5th rolls around. In the first scenario, BlackBerry is above $14 a share, and you keep the premium you were paid when you sold the put option. You would make a 5.9% return (pre-tax and commissions) in a 3 week period. Said another way, in a 3 week period you would make a return that many income investors would be happy to make in an entire year. The second scenario is that BlackBerry falls below $14 by July 5th, and you are obligated to buy the stock at $14 a share. In this scenario, the premium you were paid would reduce your cost basis to $13.17 ($14 purchase price - $.83 premium). The stock can effectively fall 9% from its current price before you have any type of loss on this trade, which would only be a paper loss as you would own the stock at a basis of $13.17 at that point in time.

I firmly believe this strategy is complimentary to both investors already long BlackBerry and those who are looking for an income opportunity. If you are already long BlackBerry, you already believe in the stock, and this gives you the chance to generate income in the event the stock continues to trade in a range as it has since the last earnings report. This strategy also would allow you to lower your cost basis in the event the stock does decline post earnings. If you are simply looking at this as income investing opportunity on a volatile stock, you can take great solace in the fact that BlackBerry has a pristine balance sheet that should provide a valuation floor very close to your $13.17 cost basis.

You are reading this article on a site called Seeking Alpha. If you own BlackBerry, over about the last 75 days your stock is exactly $.01 lower than it was the day of the last earnings report. Owning BlackBerry does not come without risk, the same as every over investment. Do yourself a favor and generate some short-term Alpha from your long-term conviction in BlackBerry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.