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Research in Motion - Going Long Volatility in the Stock

|Includes:BlackBerry Ltd. (BBRY)

 Investment idea

Reasarch in Motion (RIMM) is scheduled to report earnings after the close. Historically, RIMM has always moved on earnings releases both to the upside and to the downside. A lot of emphasis and pressure has been pent up partly due to the mounting ideology that RIMM is going to be wiped out by the advancing army of I-phones. On top of this, Google launched two new operating mobile systems yesterday in what was dubbed “D day”. These two factors as well as the current market nerves suggest that this evening’s earnings release will be used as a gauge for the future success of RIMM and hence, be closely watched by investors/fund managers alike (perhaps with a strong reaction in stock price?).

I have not been counting the amount of people who have Blackberry’s and am not sure what the earnings are going to curtail. So I don’t know exactly what direction the stock is going to go but I do know it is likely to move. Therefore, going long volatility ON THE ACTUAL STOCK feels particularity attractive for the short term. The strategy payoff is below. The light blue line is your payoff if you sell four days from now. The dark blue line is if you wait until option expiration (22 days).

Strategy Payoff

Although this may sound good in writing, we have to ask ourselves if there is any value in the trade because if you believe in efficient market hypothesis, then there is never an undervalued opportunity in the present timeframe – only fair valued deals which change accordingly. We can look at historical differences though and below is 10 day volatility charted over two years. Current 10D historical volatility is at 49.56% while implied volatility is at 53.73%. Both these values are relatively low using historical values which decreases the cost of the trade. 

Two Year 10 Day Historical Volatility
 

Disclosure: No positions at the time of writing
Stocks: BBRY