Wednesday, December 28, 2011

Earnings Play on Research in Motion: The Reverse Iron Condor

Research in Motion reports earnings on Thursday, and we think that there is potential for this stock to move a lot in either direction on the earnings report. The lingering bulls may be on their last leg on this one if they do not see something in this report that inspires them. At the same time, any news of anything bullish at all could send this one flying after its been sold off so hard. Either way, we expect Research in Motion to move a lot post-earnings. Is there any way to take advantage of a stock that may move violently without knowing the direction…yes.
Typically, individuals can use options to maximize gains in times like this. One great way to use options is by doing a reverse iron condor. By buying a bear put spread and buying bull call spread, you can know exactly how much you can lose, have an inexpensive position, and profit on a violent move in either direction. The reverse iron condor only loses on both sides if the stock does not move strongly. If the stock moves to the upside, the bull call spread will increase in value while the bear put spread goes to 0. The reverse happens on a violent move downwards.
We did some research on RIMM to see what types of moves it has made in the past ten years in the December earnings report. The stock has averaged a move of 12.71% from the day prior to earnings to the day after. The largest move was 53%. The smallest move was 1.7%, and the stock had only two years where the move was less than 5%.
So how to set up this trade?
We will look to set it up on Wednesday, and we are not sure exactly where RIMM will be trading on Wednesday. Let's estimate its trading around 16.50.
Step 1: We need to buy a bear put spread. We will buy the 16 put and sell the 15 put. Currently, that is trading at 0.40.
Step 2: We need to buy a bull call spread. We will buy the 17.50 call and sell the 19 call. Currently, that is trading at 0.16.
Now, we can configure our breakeven points by looking at the net debit between the two spreads at 0.56.
We subtract that from our bought put and add it to our bought call to find our breakeven points. That would mean we would breakeven on a downward move to 15.44 or a move to 18.06. That spread would be much closer at 16.50. Even with the spread at where it is, that would be a move of just at 5% to the downside and a move of 9.5% to the upside. When RIMM has gone up, it has never gone up less than 10%. On the way down, twice it moved over 5% out of four times. According to history, this trade should make us money. The best part of the trade is that it is very cheap.
The reverse iron condor is a great way to make money on Research in Motion (RIMM) earnings.

Good Investing,

The Oxen Group