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The Upside to RIM’s Downfall

Fin - Breakout - US

Since the start of 2011 Research in Motion (RIMM) has missed earnings once, lowered earnings guidance twice and seen it's stock fall some 40%. Who would have thought things could actually get worse?

Some nameless options trader, that's who. On Wednesday and Thursday someone, and it was likely "one," accumulated 12,000 put contracts. Puts are the right to sell a stock at a certain price by a certain time. In this case, the put buyer spent 54-cents per contract, about $65,000, for the right to sell a whole bunch of RIM stock at $32.50 anytime today. Inasmuch as you could sell all the RIM you wanted somewhere around $35 at the time the trader was in effect, making a bet that RIM would drop over 10% in one day.

"Looks to me as if they were having a simple punt on (a) relatively inexpensive play in the hopes that those three recent warnings from the company... Might lead to a devastating earnings miss," says the inimitable Andrew Wilkinson, senior options analyst for Interactivebrokers.com.

"Devastating" seems to about capture the Research in Motion conference call and the stock market's reaction. While the whole stock planet may have been texting each other over the likelihood of RIM turning in a stuck-pig ugly quarter, the numbers were actually worse than that. Despite repeated markdowns, sales of the Blackberry actually fell for the first time in 6 years. RIM dropped estimates for the current quarter from $1.05 to $0.75 and lowered their outlook for the year from $7.50 to a range of $5.25 - $6.00 (take the under).

In the words of our British friend Wilkinson "the (competitive) market has run up behind them and clubbed them over the head."

Perhaps most stunningly of all, RIM management seems to believe things are moving along rather nicely. Jim Balsillie, Co-CEO at Research In Motion, offered "RIM's business is profitable and remains solid overall." He believes "new products... will lead to strong profit growth in the latter part of fiscal 2012."

Research in Motion bulls were perhaps looking for something more along the lines of contrition and a recovery plan other than inexplicable hope. The company's stock is trading some 20% lower on the day as I type.

Which brings us back to the aforementioned options player. His or her "simple punt" put options, bought for 54-cents per, are now trading for $4.80; about a 9-fold increase in one day. In dollar terms, that works out to roughly half a million dollars in profits, after commissions and the cost of throwing c-notes into the air and spinning underneath them like Mary Tyler Moore.

Your take away shouldn't be: "Make huge one day bets on options." Instead please just remember these basic points:

  • Price to Earnings is a more or less useless, if not utterly misleading way to value stocks. "Cheap" stocks as measured by P/E are generally cheap because the underlying company is either cyclical or horrible.
  • Don't buy Research in Motion. Not at gunpoint, not for a trade, not on a dare.
  • "Co-CEO" means "no one is in charge".
  • Options are wildly dangerous as trades but option volumes can be a good tell on which way "smart money" is trading.
  • Don't buy RIM. I'm serious. Just don't.
  • The most you can lose buying a dip is everything. Every... single... thing.