Research In Motion (RIMM) releases earnings Thursday June 28 after the close. The stock closed June 27th at $9.18. At one time RIMM was a Wall Street darling, but it is now in the doghouse. Let's compare the price to book value of Apple (NASDAQ:AAPL) with Research in Motion. As the chart shows Research in Motion is trading at roughly 50% of book value compared to Apple trading at over 5 times book value.
The price earnings ratio has collapsed from over 60x to under 5x, see chart.
The stock price has fallen off a cliff.
The stock is trading below book value, suggesting that the "Street" and investors have lost faith.
New products are expected soon, but RIMM has a history of missing launch dates. But there is hope that this will change under the new leadership. Time will soon tell.
Spread Trade Idea: Long July 21 $9.00 call / Short June 29 $10.00 call for $0.61 debit or less.
The premise for entering a long July $9 call short June $10 call spread is that things are going to change for the better at RIMM. That RIMM will match or beat the Street expectations, which are low. There have been a number of recent street downgrades. An announcement that the BlackBerry 10 phone will launch early would be a welcome surprise. Or that a number of enterprise customers have signed on with pre-orders would be good news. Any encouraging news from the earnings conference call might be enough to halt the stock's decline.
The June 29, 2012 $10.00 strike call ended at $0.13 bid with the July 21, 2012 $9.00 strike call closing with a $0.74 offer. The more risk adverse way to play RIMM would be long the July 21 $9.00 call and short the June 29 $10.00 call for a debit of $0.61 or less.
Should RIMM not increase above $10.00 at the Friday close then the June $10.00 call should expire worthless, leaving the long July 21 $9.00 call. There would be time value remaining and the opportunity to sell another weekly $10.00 strike call against it.
Should RIMM pop above $10.00 at Friday's close then the spread should be worth at least $1.00, for a $0.39 gain or 63%.
The figures used ignore commissions, so the realized gain would be less.
Options are high risk may not suit your risk-reward profile. This example is for illustration only.
Disclosure: I am long RIMM.