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Wednesday, June 17, 2009

Battle of the Smartphones: 5 Detailed Option Strategies

First and foremost I must say I have the new Palm Pre and really like it. I write this post on the eve of Research in Motion's earnings release. A couple of these strategies have recently been posted on here, but I have refreshed the data to reflect pre-market June 17, 2009, and added a few more. In this post I will outline 5 option strategies (for more risky investors) I am likely to open. I will list these strategies in order from most likely to open to least likely to open. For more information about the option strategies used check out my E-Book.

Option Strategy #1: Since we are approaching Research in Motion's (RIMM) earnings release, there is likely to be some increased volatility on RIMM's stock this Friday. I am opening a Straddle option position on RIMM for the June 80 strike. RIMM is expected to report after the bell on Thursday (June 18) and historically RIMM is either POP or DROP. By looking at the last 4 earnings releases for RIMM it looks as if it moved more than 10% (up or down) each time; July 25 earnings resulted in a 13.3% drop the next day, September 25 earnings resulted in a 27.5% drop the following day, December 18 earnings resulted in a 11.4% gain the next day, and April 2 earnings resulted in a 20.8 gain the next day. The straddle can be opened for about 10% of the cost of 100 shares or $800 for both contracts. This could pay off if RIMM moves over 10%. Let's say RIMM has a very good day or very poor day on June 17, I'd consider buying the straddle for the 75 or 85 strike depending on where RIMM was. However I am hoping RIMM closes as close to 80 as possible as I'll open my position around 3 PM.

Option Strategy #2: With the release of the new iPhone 3GS, and the pre-order for the phone already being sold out, I will be opening a Buy/Write option strategy on Apple (AAPL) for July. If Apple happens to have a slight pull-back I will be looking to pick up some more shares and write it out for the July options expiration. I have been very bullish on Apple recently, and have been able to use the buy/write option strategy to make additional money (as I have been writing out of the money calls on Apple). Monday I will be analyzing which strike to write my Apple out for July (I will not have to buy it again unless Apple gets to 150 by Friday). I will most likely wait until we have about 15-20 days until expiration, unless Apple experiences a large gain before then. If I had to write my shares out today, the Apple July 145 strike looks like the best choice. It would give me downside protection of 2.1%, and a possible gain (assuming I purchased the stock June 17, 2009) of 8.4% in 1 month.

Option Strategy #3: Although the phone by T-Mobile which uses Google's (GOOG) Android OS does not get too much hype, there has been a buzz lately about the second phone "myTouch 3G" which is made by HTC (HTC). Not likely, but imagine if this phone could get the same hype the Palm Pre did. That could be very good for Google. I will be opening a Long Call position for the LEAP 2011 expiration 450 range strike on Google; I have 584 days to write out higher strike for Google on any rally (making this position a spread). I will likely turn it into a spread if Google has a significant rally. I am thinking for the 550 to 600 strike range depending on the premiums I could receive. If the phone turns out to be a complete failure, it certainly won't be the end of Google, and this call position could still easily pay off. However if you have the capital to purchase shares on GOOG in lots of 100, I'd recommend that over this strategy.

Option Strategy #4: With the release of the Pre and record sales for Palm (PALM), rumors of Dell (DELL) buying Palm, and many other rumors, Palm could keep riding the wave. Palm has yet to release the phone to a network other than Sprint (S), but if the phone comes to other carriers such as Verizon (VZ) I think it could be huge for Palm and carry the stock to the 20's just on that news. I have heard several rumors about the Pre coming to Verizon within 6 months, but as of now I can't seem to find anything that is confirmed. As stated above and in my blog I have the Pre and am very impressed. The only negative in my opinion is they only have 30 apps in the Palm App Catalog. More are sure to come, and that should tell us a lot of Palm's future success in the Smartphone space. Like Google I will be opening a Long position on Palm with a Bull Call Option Spread for the January 2010 15/25. This can be opened for about $180 per contract, and if Palm continues to rise the spread could easily pay off a whopping 555%. Yes 100% can be lost assuming the Palm January 15 expires dead, but this is a risk I am willing to take. I am hoping to get in this position within a month, and will likely try to open it if and when Palm experiences a pull-back. Some things to note are (1) Palm short interest is still extremely high 34.25%, and when Palm was at $2 a share or less I never remember it being more than 55% short interest float, what could another 15%-20% cover do for the stock? (2) The current options market is factoring in a greater than 25% chance Palm stock expires at or higher than $25 a share at January 2010 expiration, and a 50% chance Palm will expire at or above $17.50 a share come January 2010 expiration (will make profit on the position).

Option Strategy #5: With the success of the E71, Nokia (NOK) has released an updated version of the E72. However after reading several articles about this phone, I am not impressed, and frankly not that bullish on Nokia. I am not an expert on Nokia phones, but I do know the new Apple iPhone, the Palm Pre, and Blackberry Tour will be an even tougher space to invade given their prices. I will be looking at opening a Put position for the October 2009 12 strike on Nokia if the stock rallies at all on increased speculation of the new phone. The E72 is not scheduled to ship until Q3, so I may move my strike to September when the expiration comes available. My ideal preference for this position would be 50-60 days until expiration and no more than $40 per contract to open.

Those are my 5 in depth option strategies and the order I'll likely open them. If you like any of these ideas, but are more bullish/bearish you’ll want to adjust the strike price and expiration accordingly. It is important to have a good understanding of options before entering any position, to learn more about options check out my E-Books.

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1 comments:

CloroxCowboy said...

For the RIMM straddle idea, can you comment on how IV has historically reacted around earnings dates? Was this taken into account in your strategy?

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