Bullish On RIM? Cover Yourself With Call Options

| About: BlackBerry Ltd. (BBRY)

Research In Motion (NYSE: RIMM) has rallied over the past few trading sessions, including on Thursday when it was up 11% on news that it was ridding itself of a cloud-based service. All of this comes as the unveiling date for its long-awaited BlackBerry 10 nears. The device is set to be released on Jan. 30, which should cause the stock to rally even further.

RIM sold the cloud service, called NewBay, to Sychronoss Technologies (NASDAQ:SNCR) for $55.5 million. Great, except it paid $100 million for the company. Still, selling of the cloud service shows the company is trying to shore up its finances, and such steps should bode well for it in the future. However, it remains to be seen if that move, or the next generation smartphone and operating system, will be the catalysts needed to further improve the company's stock performance. If you are mildly bullish about RIM, especially in light of the release of the BB 10, you may consider a covered call strategy, which can allow you to collect premium if RIM rallies.

RIM's Predicament

Of all of the smartphone makers and operating system developers, RIM will forever be chosen as a prime example of what can go wrong when you don't stay ahead of the pack or at least try to keep up with it. Most agree that RIM has fallen victim to strong competition. Unfortunately, the company's financial performance has created considerable pessimism among investors who doubt any product from the software and hardware maker will be sufficient to compete with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) powered Android devices. And there is Nokia (NYSE:NOK), which has seen an uptick in sales due to its Lumia 900 smartphones that run on Microsoft's (NASDAQ:MSFT) Windows 8 OS.

Still Some RIM Bulls

Despite the demise of the maker of what die hard fans called the "crackberry," many investors remain optimistic and bullish about the stock. RIM had been trading as high as about $14 last week, only to tumble almost 14% by the closing bell yesterday. It closed at $11.76. The decline was sparked after the company released its third quarter earnings report. During the days leading up to the earnings release, it had rebounded significantly from the low of $6.30 it was trading at toward the end of September.

Also, the stock suffered a set back on Dec. 20 when it was downgraded to a hold from a buy by Hudson Securities.

Just As Many Bears

Even though RIM's overall third quarter results were decent - it beat analyst estimates - investors exited their positions on the stock when they learned that revenue from its monthly services could fall. The company's weak EPS growth, worsening net income, below par return on equity and poor profit margins are the major factors that are causing pessimism.

For example, as of October, RIM's gross profit margin is 26%. That's low when compared to the gross profit margins of Apple and Google. Their gross profit margins were 40.44% and 53.52%, respectively.

Even more reason for the bearish sentiment relates to the company's EPS. During the past fiscal year they were $2.23 compared to being $6.36 in the prior fiscal year.

Glimpses of Hope

One of the reasons to be bullish on RIM relates to its EPS. Ford Equity Research found that although RIM's earnings have declined to an estimated $-0.78 from $3.27 over the past 5 quarters, they have shown strong acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates that earnings growth may occur in the future, and I think this may happen if the BB10 is well received).

Writing the OTM Covered Call

The covered call options strategy entails being long the underlying stock and short a call option. It's also known as a buy-write transaction because you buy the stock and write, or sell, the option, notes Born to Sell, a covered call website.

This strategy is an ideal way to earn premium, and add protection from losses if the price of the stock goes down below the strike price of the call option that was chosen. With this in mind, you may consider the options that expire in February, which would allow time to see how the BB 10 will be received. The call that expires Feb. 15, with a $15 strike price, already has an open interest of about 16,000 contracts. The volume traded was about 2,600 at the time of writing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , Diversified Communication Services, Canada, Options
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here