The RIM Death Spiral “Redeux”!

I am sure many of you will remember the blogs I posted last year on Research in Motion (TSX: RIM, Friday’s close $17.61). Too bad really… as I am trying to forget much of what I said! Especially my comments in the July 3, 2012 blog (The RIM Death Spiral!) where I talked about the possibility of the company going the way of Nortel in another example of what can happen to a company that fails to innovate.

At the time I panned RIM’s new operating system (Blackberry-10) and questioned whether the company could even survive long enough to complete it… WRONG!

To make matters worse I reiterated that position when RIM rallied during the first couple of weeks in August 2012 on takeover/buyout rumors. You may recall that Best Buy had received an offer from one of its Founders to take the company private. The deal never went through but RIM benefitted from a spillover effect. The mere possibility that a Founder was willing to take a company private in the hopes of spurring a turnaround raised the possibility that one of RIM’s Founders might engage in the same strategy. They never did!

When shareholders realized that the optimism was unfounded the sellers reengaged and RIM shares sold off eventually closing at $6.25 by the September 2012 expiration. In fact that was the only thing I got right in the July 3rd blog.

My apathy for RIM in the July 3rd blog gave rise to two possible strategies; 1) a September bear call spread (i.e. sell the RIM Sept 7 calls and buy the RIM Sept 10 calls for a net credit of $1.00) or 2) an outright purchase of RIM Sept 8 puts for $1.15. The RIM Sept 8 puts closed at $1.75 at the September expiration and both calls in the bear call spread expired worthless leaving the trader to pocket the $1.00 per share profit. If nothing else it shows that sometimes you can be wrong and still be profitable.

It wasn’t until late September when RIM began to resuscitate. Investors became engaged in the possibilities around the new operating system. And since that point, the stock has been on a winning streak up more than 180% in four months and on Friday, closed within pennies of a 52 week high.

I am happy to eat crow on this one as nothing would please me more than to see one of Canada’s premier technology companies succeed. But, and maybe this is my innate stubbornness, I remain skeptical!

I worry that investors have imputed expectations that Blackberry 10 cannot possibly meet. If so RIM will run into some headwinds. There will be those investors who will want to reduce their exposure by booking profits prior to the Blackberry 10 official release. Others will engage in the time tested strategy of buying on the rumor and selling on the news often just before or right after the release.

I am reticent to make suggestions about the future for the company. For obvious reasons! But if you are of a similar mind about the short-term headwinds you could look at a March bear call spread. Sell RIM March 17 calls and buy RIM March 20 calls for a net credit of $1.20 per share.

I would not buy puts at this stage mainly due to the elevated volatility being implied in the RIM options. For example, the implied volatility on the RIM March options is averaging 80% which is in the top 10% of all Canadian options.

On a personal note I hope the company succeeds… I want to be a believer!