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Why Options Traders Think Blackberry Won't See A Big Earnings Miss

|Includes: BlackBerry Ltd. (BB)

When a technology company reports earnings, a stock can move as much as 10% up or down on a solid earnings beat or miss. In the case of Blackberry, sentiment has been terrible since the last earnings report but a big move isn't implied by the options premium.

Traders a pricing only half the downward move of last quarter
At the money puts expiring this Friday are only pricing in a 4.4% move to the downside. This means that traders do not believe Blackberry's share price will be as volatile after earnings as it was last quarter.

At the money means that the strike price is consistent with the current share price so if shares of Blackberry are trading at $8.00, a put with an $8.00 strike price would be considered at the money.

Small put premium compared with last quarters post earnings move
Since Blacberry's puts that expire this Friday are priced at $0.36, traders are expecting that a miss would cause no more than a 4.4% move downward. This is much less than the 7.1% decline that Blackberry experienced after its last earnings report.

Last quarter saw a big negative reversal
Just as a reminder, on 3/27, Blackberry shares closed at $9.05 and after earnings, the company gapped up initially to $9.20 before concerns over continued revenue declines and a massive drop in cash (partly due to the accounting treatment of debt) caused people to become more cautious.

Isn't sentiment negative?
What gives? Isn't sentiment around Blackberry extremely negative? Every article we see from the press indicates it is one step away from demise. What are the options traders seeing that we are missing?

Risk is to the upside
Maybe they understand that reports of Z3 sales in Indonesia were strong, expenses have been brought down, Blackberry is closing the app gap by embracing Android, manufacturing is being done at a lower cost, real estate has been sold off and a debt offering has been completed to stabilize cash somewhat.

How to play it

In our last article on Blackberry, we suggested a conservative long strategy into earnings might be appropriate for some investors. Buy the stock and a married put for a total cost per share of $8.36. This allows investors to participate in upside over multiple weeks but shelters them from short term volatility for two days after earnings are announced.

New product, lower cost structure, and new strategy. Options traders seem to think that the risk of a painful miss is less likely than last quarter. What do you think?

Disclosure: The author is long BBRY.

Additional disclosure: The author is long puts.