RIM Shot

Canada’s Waterloo, Ontario-based Research in Motion Ltd. (TSX: RIM; $55.78) is experiencing a spot of bother. While the company announced on-consensus fourth-quarter earnings, its guidance for weaker future performance got the sell tickets flying. Shares dropped $6.71, or more than 10%, from Thursday’s post-market announcement to Friday’s open. Some analyst downgrades last week didn’t help either, and share price took on all the trappings of a major “system error” for the company.

It’s all because RIM’s battle with competitors Apple Corp. and Google Inc. for market share in the red-hot smartphone and tablet markets seems not to be progressing well. Last year’s launch of its highly-touted Torch smartphone as an iPhone buster didn’t bust Apple’s bastion one bit. Nor did it dent Google’s Android operating system, which has found a home in just about every other big non-Apple smartphone service in the US.

The trouble is that although RIM’s sales climbed 33% over the past year, its smartphone market share has dropped nearly in half, falling to 22% from 40%. And that’s in a smartphone market that’s exploded 50% from a year ago. Not only is RIM not playing catch-up, it’s steadily losing ground. And there’s no joy in the company’s new Playbook tablet – the putative iPad buster. But Motorola Mobility Holdings Inc.’s Xoom tablet and Samsung Electronics Co.’s Galaxy Tab will also be jostling for a wedge of that increasingly crowded shelf space. Consensus sales estimate for 2012 were recently at 2.7 million. Compare that with the 4.19 million iPads Apple sold in its fiscal 2010 fourth quarter alone (ended Sept. 25, 2010), and you’ll get a sense of why goats are the theme of the day here.

RIM’s string of recent misfires doesn’t mean the company is down for the count, by any means. But “goat” status in the marketplace puts it potentially in a vulnerable spot. We know the market is filled at all times with assorted multi-fanged predators, always stalking, always hungry. And the gastric rumbling lately has been almost deafening. For example, AT&T Inc. recently pounced out of the bushes on rival T-Mobile USA, a takeover deal that would vault it over rivals Verizon Wireless and Sprint Nextel Corp. in terms of number of wireless subscribers. In a marketplace undergoing a consolidation phase, a low enough valuation is likely to attract the interest of larger, hungrier rivals – or other predators – soon enough.

Given the goat label traders might want to look at a bearish trade on RIM. Especially, if you think that RIM’s share price could still test last September’s 52-week low of $44.94.

Given the recent sell-off RIM options have traded at slightly elevated implied volatilities, currently in the 33% range. That implied volatility level puts RIM options in the top quartile of all Canadian equity options, which simply means they are expensive relative to other stock options.

That said, if you think RIM has more downside over the short term (i.e. within the next eight weeks) you might want to look at buying the RIM May 54 puts at $2.05. With the puts, you risk is limited to the cost of the options. And potentially, if RIM does test its lows, the puts would be worth five times their initial cost. However, as you should always be mindful of short term risks, I would sell half your position if the RIM May 54 puts double.

If you are hesitant to buy options at these implied volatility levels you could also look at bear call spreads. For example, you could sell the RIM May 56 calls at $1.60 and buy the RIM May 64 calls at 20 cents for a net credit of $1.40. The bear call spread is profitable is RIM is below $57.40 at the May expiration. The maximum profit occurs if RIM is trading below $56 at expiration, in which case both options would expire worthless and you would retain the entire credit.