This One’s For The Blackberry Bulls

Few Canadian stocks have garnered as much attention as Blackberry LTD (TSE:BB). In fact, it has been the topic of a few of my postings over the last year or so. Why, you may ask? Well, option traders love volatility. By that I mean price action, and fewer Canadian stocks deliver as much action as Blackberry. With a historic volatility of close to 60%, this stock can deliver some significant price movement within a short period of time.

As a reminder, historic volatility is the measure of the fluctuation in share price (up or down) from the average share price over a period of time. The higher the number, the greater the deviation from the average and subsequently, the more volatile the stock.

Blackberry shares delivered a 47% move higher from $8.50 to $12.50 from mid June until mid July. I was amazed at how many people reached out to me when the shares were at $12.50, asking if it was a good time to buy. This in and of itself is typically a contrarian indicator.

Beyond that, there were a couple of technical observations that indicated upward momentum was slowing and that there may be a pull back which would offer the die-hard Blackberry bull and opportunity to “buy the dip”.

Stock prices never move in a straight line and investors should never feel so compelled to take action that they can’t wait for a more favorable entry.

The recent pull back in Blackberry (TSE:BB) was largely attributed to Apple and IBM announcing an alliance to create new apps for business. This is a space that Blackberry was largely focusing on. That said, prior to the significant drop in share price, the chart was suggesting that a pullback was highly probable.

It is important to note that these observations are not a 100% guarantee that the shares are going to sell off, nor does it suggest the scope or duration of the potential move. These observations simply suggest to an ambitious bull to be patient. A trader looks to lock in profits, and with Blackberry being a “traders stock” these observations (along with a 47% move in share value) would be all I would need to ring the register and sell some shares.

So…now that we have seen a pull back how would I play Blackberry (TSE:BB)

To circle back to volatility, using a strategy with a limited risk on a volatile stock makes the most sense. With the stocks historic volatility being high, the options implied volatility, which is the expectation of movement priced into the options, is equally high. I would use a Bull Call Spread to offset volatility, reduce my cost basis, lower may break even and limit my risk in case Blackberry shares continue lower.

I would look to capture a re-test of the $12.00 resistance level by constructing a 10/12 Bull Call Spread out to September. I would do this by purchasing the $10.00 strike call and simultaneously selling the $12.00 strike call.

Prices for the options at close yesterday were as follows:

September 10 Call – $1.40 BUY
September 12 Call – $0.55 SELL

The net cost of the spread would be approximately $0.85

The profit potential is $1.15 if the shares of Blackberry (TSE:BB) are trading anywhere above $12.00 on the September expiration.

With the shares currently trading at $10.73, this spread is just shy of its break even point, which is $10.85. This is calculated by adding the cost of the spread to the purchased strike.

In my opinion, this offers the Blackberry bull an asymmetric risk/reward opportunity with a limited risk exposure on a very volatile stock. In addition, the stock does not have to move all that much higher for the spread to break even, and only has to be trading around the $12.00 level to realize full profits.