Profit From Extremely Negative Sentiment On RIM

Apr.12.12 | About: BlackBerry Ltd. (BBRY)

By now, you've probably heard plenty about the demise of Research in Motion (RIMM). Sentiment is extremely negative on the name; everybody and their mother thinks the company is going down. Some analysts have gone as far as saying on live TV that RIM will be out of business.

I am not arguing for RIM's comeback (even though I would cheer for them). Admittedly, things are not going well and will likely continue to get worse until the new BlackBerry 10 phones are released later in the year. Even then, some argue that RIM has an extremely difficult challenge ahead of them to gain market share.

I get the worries. I get the criticism. I get the negative comments. But all of that is priced in the stock, and then some.

RIMM has approximately $4/share in cash and investments. Tangible book value, which excludes patents and any intangibles, is $12.40/share. The patent portfolio is estimated to be worth between $5 and $10/share by various analysts. RIM also receives almost $2/share each quarter from very high margin recurring services revenue. The company can pay most of its bill from the services revenue until new handsets hit the market without tapping into it's cash reserve.

If you have the risk appetite, you can consider buying the shares outright. If you are more conservative or think there is still some downside, selling cash covered put options is a great way to capitalize on the negative sentiment. Option premiums are very high and can reward the option writer handsomely.

Consider this trade: place $9/share in your brokerage account as collateral. You can sell December $10 strike puts on $RIMM for $1/share net of commissions. If the stock does not drop below $10/share by the expiry date in December, you get to keep $1/share in option premiums. That is a return of 11.1% in 8 months, or 16.7% annualized.

If the stock is below $10/share on expiry, you will have to purchase the shares at $10. In this case the average cost base will be $9/share, well below expected tangible book value.

Disclosure: I am long RIMM through a short put option position.