I Was Tempted

RIMM Puts Just Not Worth the Risk

By Bryan Bottarelli
Friday, December 22, 2006 10:50 AM EST
Fri, 22 Dec 2006 15:50:00 GMT

Dear Bottarelli Research Member,

As you know, Wall Street has been stuck in the habit of punishing stocks that report great earnings. It’s your classic “sell on news” pattern — and it has been very prevalent in stocks here in Q4. So I’m not going to lie: I was tempted to play put options this morning on Research in Motion (RIMM – NASDAQ) when I noticed that the stock reported great earnings and jumped $8.00 higher in pre-market activity.

RIMM

It was my inclination that RIMM would initially jump — but then fall back lower as the day progressed. And thus far that thesis has been correct — as RIMM has trimmed an $8.00 gain to a $2.50 gain. To be honest, I wouldn’t be surprised if RIMM closed the day in the red, but as I run the numbers on the RIMM options string, the risk/reward scenario just isn’t in our favor.

For example, the RIMM January 135 Puts (RFY MG) have traded as low as $3.30 and as high as $6.30, a 90% swing in just the first hour of trading! I was considering buying these puts around $5.00 and immediately placing a sell order at $6.30, a trade that would have resulted in a 26% gain. But the more I looked at it, risking $5.00 per contract to gain 26% on a super-volatile stock like RIMM today just didn’t add up. So I’ve decided to pass, which I feel is the smart thing to do.

As I said yesterday, next week will hand us some great bargains — so it’s best to take the holiday weekend to relax and we’ll hit it again next week. After all, many of the set-ups we spoke about this week are already playing out. For example, we’re seeing a nice bounce today in Apple Computer (AAPL — NASDAQ).

AAPL

We’re also seeing weakness in the transport sector, which is pushing down Norfolk Southern (NSC – NYSE), as we discussed yesterday. We’re also seeing slight weakness in both of our uranium names Cameco Corp. (CCJ – NYSE) and BHP Billiton (BHP – NYSE), which is pushing their call premiums nice and low. Next week, after some extended time decay, we should have some great opportunities.

Until then, I’d like to sincerely wish you a memorable, safe, and happy holiday season.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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