Research in Motion Options Post Introduction of Their Apple iPhone Knock Off

Includes: AAPL, BBRY
by: SA Editor Rocco Pendola

I ain't lookin' for praise or pityi
I ain't comin' 'round searchin' for a crutch
I just want someone to talk to
And a little of that Human Touch

-Bruce Springsteen, Human Touch

Over the weekend, a friend pulled up a website that he wanted to show me on his BlackBerry. After he handed me the phone, I immediately started tapping the screen to make the text larger. I tapped and nothing happened. After my third attempt, he noted, "It's not a touchscreen," directing me to that awkward and tiny ball that controls the screen. While Apple (NASDAQ:AAPL) didn't invent the touchscreen with the iPhone, they deserve credit for popularizing it.

Now, several years late and millions of dollars short, Research in Motion (RIMM) will bring a touchscreen BlackBerry to market this summer... probably. With RIMM, you just never know. At this juncture, it's difficult to determine which half of the company's CEO team makes the firm look worse, Co-CEO Jim Balsillie or Co-CEO Mike Lazaridis. Lazaridis spent Monday feebly defending RIMM to analysts. As the Wall Street Journal notes, Lazaridis inspired more uncertainty with his comments in response to analyst questions, including one that suggested RIMM brass walks around acting as if nothing is wrong in Waterloo:

I hope you don't get a sense that I'm ignoring what's happened ... I live it everday ... If you want an apology for being late on some of our products, I can give that to you, but it's not because we weren't working hard.

I understand that his partner, Balsillie, wants to bring hockey to Southern Ontario, but the hockey player-like responses just don't fly in the world of high technology. Nobody cares if you're working hard, but just couldn't get the puck in the back of the net. The worst part about Lazardis's mea culpa, however, is that, alongside making it, RIMM showed up late with a product, yet again. I was going to try to come up with some snappy analogy regarding the forthcoming BlackBerry touchscreen, but I think it's all too obvious.

How in the world does RIMM think it's going to beat Apple and other touchscreen imitators at the game Steve Jobs created? Apple did not succeed by giving the people what they want. Quite the contrary. Apple succeeded by implementing existing technologies and developing products it knew people would want. There's a major difference. It's the difference between leader and loser, between first and fourth place. Simply put, Apple sets trends, companies like RIMM respond to them.

RIMM already trotted out a cheap imitation of the iPad. Given its focus on corporate customers, I can, for the sake of argument, forgive that. But if the company truly wanted to start shoveling dirt out of the grave it's digging for itself, it would have done something other make everybody wait a few months for yet another Apple knockoff. When will companies like RIMM, purportedly cutting edge firms, think of something new? I am not sure what else RIMM should be bringing to market, but, at the end of the day, I am not charged with the task of figuring it out.

According to's InPlay service, RIMM did something else I have a hard time believing. On Monday morning, the company reaffirmed its FY2012 EPS of $7.50. The consensus estimate stands at $6.62. After guiding down for Q1, RIMM expects enough of a Q3 and Q4 rebound to easily beat estimates for the year. They hinge this prediction on "anticipated strong revenue growth ... driven primarily by the launches of new BlackBerry smartphone products and prudent cost management." They're better off heading north to Woodbine and putting it all on a long shot in the 8th race.

RIMM's Q1 guidance made it the short of the month for April. On March 28, 2011, I suggested going short RIMM via January 2012 $55 put options. At the time, they traded for around $6.50. As of Monday's close, they traded at $10.40. RIMM's more than optimistic prediction that it will rebound, somewhat miraculously, and not just beat, but crush FY2012 estimates makes it the short of the year. Heading into this play, however, I believe you can act aggressively.

Generally, I like to stick with in-or-around-the-money options. With RIMM, however, I think we will witness an implosion of epic proportions heading toward and into 2012. Only a few things can change RIMM's fortunes -- a buyout, a partnership with a company like (NASDAQ:AMZN) to produce a new tablet, or a new management team. On each point -- why would anybody want to buy RIMM? I think Amazon will partner with a powerhouse such as Google (NASDAQ:GOOG) before a has-been like RIMM. And the last thing Balsille will do is fire himself.

To take advantage of the likelihood that RIMM will continue to fail longs, I offer a multi-faceted options strategy that allows you to profit from static movement or downward pressure on the shares.

First, I would execute bear call credit spreads on RIMM on a monthly basis. To initiate a bear call credit spread, you buy one call and sell another. To generate the credit, you buy a further out-of-the-money call and sell a higher-priced closer-to-the-money call. Because May's low premiums do not make it worth it for most investors, I suggest starting with the RIMM June monthly calls. As of Monday's close, you could sell the RIMM June $55 call for roughly $0.78 and buy the RIMM June $65 call for roughly $0.10. For each spread you open, you collect a total premium of $68, excluding commissions. If the shares move down, trade sideways, or even go up a bit from Monday's closing price of $48.10, all of the options will expire worthless. If RIMM rises above $65, the difference between the two strike prices minus the premium you received represents your maximum loss. If the bearish trend in RIMM sustains, you can repeat this process monthly or even weekly.

With the proceeds generated from this strategy and other cash, I would build a position in RIMM January 2013 puts. While I would consider in-or-at-the-money LEAPS options, I am bearish enough on RIMM's long-term fortunes that I am more than comfortable going with out-of-the-money plays. In both the credit spread and LEAPS scenarios, your risk profile and sentiment toward RIMM dictates the strike prices you select. For the LEAPS, I would play anything between $35 and $55. For the record, my favorite play is the RIMM January 2013 $40 put, which last traded for $5.00 on Monday.

Over the next several months, you can move from credit spread to credit spread and build a position in the LEAPS. If RIMM misses quarterly or its own seemingly unrealistic yearly estimates and the shares continue their march south, you can begin unloading parts of the put position for profits. As with all of my suggestions, I offer them as a starting point for your own due diligence on the narrative and rationale I provide.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in RIMM over the next 72 hours. Author may also go long or short AAPL or AMZN at any time.