Is Blackberry Back in Favour or Just Getting Squeezed?

Jason Ayres
January 13, 2014
9 minutes read

Blackberry (TSX:BB) has enjoyed a fairly impressive snap back over the last few weeks. Since the beginning of December, shares have climbed from $6.00 to $10.00, or a whopping 66%.

The turnaround can be attributed to a couple of things. John Chen took over as CEO back in December , signing a manufacturing agreement that set the tone for a renewed confidence from investors. This is perceived to be the start of a possible recovery for the Canadian tech giant and warranted an upgrade from RBC.

According to the Financial Post, Although BlackBerry still faces substantial long and short term challenges, RBC Capital Markets financial analyst Mark Sue believes the company’s new management team is moving quickly to “improve liquidity and strengthen the balance sheet.”

That being said, according to Bloomberg, of the 41 analysts that track Blackberry, 27 are neutral, hold or sector perform. Eleven suggest a sell/under perform rating while only 3 have a buy/outperform rating.

I don’t fully believe that the recent share appreciation is due exclusively to the change in management. While this certainly provided a catalyst, I would also suggest that with such a huge percentage of short interest, we have seen and are still seeing a good ol’ short squeeze taking place.

What’s a Short Squeeze?

When a stock begins to show weakness, sophisticated traders and investors will “sell short” the shares. The intention is to borrow the shares from their broker and sell them at the higher price. They then receive the equivalent amount as a dollar credit to their trading account. This creates an obligation to cover the shares or, in other words buy them back and return them to the broker. The object is to buy them back for less then what they were sold for. The trader/investor then only has to use a portion of the credit they received to cover their obligation and return the shares. The result is that they keep the difference and lock in a profit.

Of course the opposite occurs if the shares trade higher then the shorted price. In this case, the short trader/investor must buy to cover at a higher price, giving back the credit plus the difference between the short price and the higher market price.

A short squeeze occurs when there is a large short interest in a stock and the prices start to rally. As the price of the shares rally, the short trader/investor must “buy to cover” their position to take profits or cut losses. It becomes self-perpetuating in that the higher the price goes, the more the “shorts get squeezed” and are forced to buy to cover and with demand increasing from the buying, the price goes higher…and so on. This gives the illusion that buyers are entering into the market because shares are undervalued when really, it is just the result of profit taking and risk management on the part of the short interest.

So what Does This Mean?

Blackberry’s short interest has decreased significantly over the last few weeks. This does not mean that the stock is now guaranteed to trend back to it’s previous historical highs. As I quoted above, many analysts believe that they are not out of the woods yet. However, we may be able to catch the tale end of the short squeeze momentum higher, and renewed interest from investors who have been on the sidelines. In fact, just the other day, a friend of mine who does not trade or invest asked me how to buy options on Blackberry. This indicates to me that the average Joe is now interested in putting a little capital towards the stock and suggests that we may be able to catch a short term push higher on that renewed public interest. After all, to paraphrase Jesse Livermore, there is no better way of advertising if you want to attract buyers then increasing the price of the stock…the public is listening and buying it.

While I don’t believe that the share value will continue to climb higher in a straight line, it is quite possible that we will see $12.00 over the next few months. While we could buy the shares out right, with a short term upside target in mind, I would be more inclined to use a Bull Call Spread

The Bull Call Spread

The Bull Call Spread involves the purchase of Call option and the simultaneous sale of a Call at a higher strike.

The spread trader pays a premium for purchasing the call and a debit takes place in their trade account. At the same time, the call at the higher strike price is sold and a credit is added to the trade account. Since the call at the lower price costs more than the call that was sold further out of the money, a debit is still incurred.

The profit potential is limited to the spread between the long (purchased) Call and the short (written/sold) Call.

So since we are bullish we are using calls. With this strategy we can only benefit in the upside move in the stock by the spread difference. The trade is still a net debit to the trading account.

bull call spread

A Bull Call Spread on Blackberry (TSX:BB)

On Friday, January 12 2014, Blackberry (TSX:BB) was trading at $9.50.

  • A March expiration, $10.00 strike call is asking $0.75 or $75.00/contract
  • After BUYING 1 contract, the investor would see a $75.00 debit in their account
  • A March expiration, $12.00 strike call is bidding $.15 or $15.00/contract
  • The investor would SELL this call and a credit of $15.00 would be added to the account
  • This would result in a net debit of $60.00
The ResultThe investor has reduced their cost and subsequent risk exposure down to $0.60/share or $60.00/contract. This represents the maximum risk to the investor. The trade off is that profits are limited to the difference between the spread minus the cost. In this case the investor may profit $1.40/share. This is determined by subtracting the $0.60 cost of the spread from the difference between the $10.00 and $12.00 strikes. in other words the investor has the potential to make $140.00 profit for a $60.00 risk for every spread purchased. A potential 233%.

Important Considerations
The investor can close the position at any time prior to expiration to lock in profits or cut losses. The Debit Spread is a powerful option trading strategy to add to your list of considerations and a must for any aspiring option trader to learn. By understanding this strategy, the investor can take a decisive stance on a stock and capture a potential short term momentum move in their anticipated direction. This strategy also allows the investor to reduce their risk and lower the break even point of a trade while still benefiting from an attractive, asymmetrical risk/reward opportunity.

Jason Ayres
Jason Ayres http://www.croftgroup.com/

CEO and Director of Business Development

R.N. Croft Financial Group

Jason is CEO and Director of Business Development at R N Croft Financial Group, a member of the Croft Investment Review Committee and a Derivative Market Specialist by designation. In addition, he is an educational consultant for Learn-To-Trade.com and an instructor for the TMX Montreal Exchange.

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