Monday, August 1, 2011

Research in Motion (RIMM) - Elevated Vol and Gapping Stock

RIMM is trading $24.80, down 0.8% with IV30™ up 2.8%. The LIVEVOL® Pro Summary is below.


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Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market.

I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

The RIMM Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

On the vol side, we can see:
IV30™: 60.15
HV20: 45.84
HV180: 50.50

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock. On the stock side (top portion), we can see three gaps down -- two off of earnings (Blackberry has been getting beaten pretty substantially by iPhone from the reports I've read off of earnings). Interestingly, though, the stock of late has moved at a lower vol realized vol than the long-term trend (HV180).

Let's turn to the Skew Tab.

We can see the ATM vol in the Aug monthlies (yellow) is well below the Sep options (that may be due to an earnings release/projection in Sep). But, the upside in Aug is priced to higher vol than the Sep options.

Let's look to the Options Tab (below).

We can see the Aug monthly ATM straddle is priced at ~$2.53 mid-market, or 54 vol.

Possible Trades to Analyze
1. There a couple of ways to digest and analyze trades on this stock. One is to sell what may be elevated vol in hopes that the stock continues to hover in the $25 area. Selling the Aug 25 straddle @ GT $2.50 while covering with an OTM strangle (like the Aug 22.5/27.5) could collect ~$1.65 and risk $0.85 which yields just under a 2:1 MaxGain:MaxLoss. Obviously, there are several other ways to sell that Aug vol.

2. A second way to analyze this vol is just the opposite of the first. RIMM does tend to gap (see stock chart), perhaps the elevated vol is just a reflection of that risk, and even further, perhaps the dipping HV has kept the IV too low. In English, maybe purchasing the vol is the trade most worth analysis.

And yes, I know, I just discussed two directly opposite views...

This is trade analysis, not a recommendation.

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