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Research In Motion (RIMM) is set to announce Q1 results for FY2012 on June 16.

Analysts covering what may be one of the most hated equities currently trading expect EPS in the neighborhood of $1.32, within guidance provided by the company but toward the low range. Research In Motion itself revised estimates on April 29:

  • Revenue target was cut to $5.2B from $5.6B.
  • EPS target was cut from $1.47-$1.55 to $1.30-$1.37.

The fear and loathing surrounding Research In Motion is palpable, with the stock seeing a 1.22% drop (up 0.22% after hours) on a day when indexes saw a strong bounce courtesy of less-than-terrible retail sales figures from the Commerce Department and a strong industrial production report from China.

Adding to the turmoil, a class lawsuit was filed on June 13, on behalf of shareholders by Robbins, Geller, Rudman & Dowd LLP, pursuing remedies under the Securities Exchange Act (Reuters.) Although the venture is likely to be met with failure--the same law firm filed a similar lawsuit on behalf of a different client on May 26, then almost immediately asked for voluntary dismissal on May 31--it's yet another piece of bad news piled on an already smoldering pyre.

With analysts slashing price targets for the stock (SeekingAlpha) and vague takeover rumors floating around the edges of the market, option plays capitalizing on prevailing sentiment of doom present themselves.

But first, here are reasons to be optimistic about Q1 results:

  • Research In Motion has a remarkable track record of under-promising and over-delivering, beating consensus estimates for 10 out of the last 10 quarters (Source: Fidelity Investments.)
  • While its PlayBook tablet has not been well received at launch, any additional revenue represents a net positive to the bottom line. RBC Capital Markets noted on May 20t that RIMM seems on pace to sell about 250,000 units per month, a significant additional revenue stream.
  • ComScore reports on U.S. mobile subscriber market share point to a decline but not a collapse of BlackBerry sales, with an approximate 9% drop over the last 3 months, well within provided guidance (Source: ComScore press release.)
  • Market share aside, Research In Motion is absurdly undervalued--there's no shortage of analysis on the financials, but I'll point to my own article (SeekingAlpha) on the matter and David Trainer's (SeekingAlpha) excellent breakdown of how profitable the company is.

The equity is priced for calamity and the slightest smidgen of good news, even a marginally more positive EPS result, is likely to cause a positive reaction. With a cautionary note about how risky short-term option plays are, and how falling knives are always dangerous, here are two bullish short-term strategies with potential for significant returns:

Buying July 18 $37.50 calls for $1.75 per contract is quite aggressive:

The day after the earnings announcement, June 17:

  • Break even point will be $36.05, a 0.81% positive target for the stock.
  • Assuming 5% price appreciation post-announcement ($37.56) yields $73.42 per contract, a return of about 42%
  • Assuming 10% price appreciation post-announcement ($39.36) yields $180.18 per contract, a return of about 103%.

On June 22:

  • Break even point will be $36.43, a 1.87% positive target for the stock.
  • Assuming 5% price appreciation post-announcement ($37.56) yields $55.82 per contract, a return of about 32%.
  • Assuming 10% price appreciation post-announcement ($39.36) yields $162.97 per contract, a return of about 93%

On June 29,

  • Break even point will be $37.26, a 4.19% positive target for the stock.
  • Assuming 5% price appreciation post-announcement ($37.56) yields $15.72 per contract, a return of about 10%.
  • Assuming 10% price appreciation post-announcement ($39.36) yields $124.33 per contract, a return of about 71%.

Another similarly aggressive strategy involves selling August 20th $37.50 puts for $4 per contract. This implies a break-even point of $33.50, a 6.32% drop from current price point.

The day after earnings announcement, June 17:

  • Break even point will be $35.69.
  • Assuming 5% price appreciation post-announcement ($37.56) you will be able to close out the short position for $2.98 per contract, netting $1.02.
  • Assuming 10% price appreciation post-announcement ($39.36) you will be able to close out the short position for $2.24 per contract, netting $1.76.

On July 18, halfway to the expiration date:

  • Break even point will be $34.46.
  • Assuming 5% price appreciation post-announcement ($37.56) you will be able to close out the short position for $2.15 per contract, netting $1.85.
  • Assuming 10% price appreciation post-announcement ($39.36) you will be able to close out the short position for $1.42 per contract, netting $2.58.

As always, be careful out there.

Source: Research In Motion: Low Cost, High Risk, High Reward Option Plays