In Motion, but In Which Direction?
Research in Motion (RIMM), maker of fine Blackberry-branded devices, is a company built on a fad. Corporate users relied on their "crackberries" for years, especially when travelling or otherwise out of the office. But Apple's iPhone was Blackberry's first serious competitive threat, and the flood of Android devices were the second half of the one-two punch. The fad is over, and RIMM is shrinking.
For some reason, the investment community doesn't seem to have accepted this obvious fact. Analysts still talk in breathless whispers about RIMM's upcoming tablet devices (I'm betting it'll suck), and the amazing experience provided by its latest phone operating system refreshes (evolutionary, blah). Many otherwise intelligent hedge fund managers still treat RIMM like a tech sector bellweather, buying it up on every positive rumor, selling it off again on every fundamental stumble. As far as I'm concerned, RIMM is as relevant today as Digital Equipment Corp was in 1997. Unfamiliar with DEC? I rest my case.
Just like an eccentric hermit who occasionally ventures into the big city for a group therapy session, RIMM lovers are periodically snapped back to reality. This check happens quarterly, when RIMM reports earnings. This is my opportunity for one of my very most favorite short-term trades: buying puts on RIMM just before earnings come out. I have had varying success lately, as bubbly investors drunk on excess Fed liquidity shrugged off what could only be described as luke-warm results. But overall I believe the trade is a good one, and I had another opportunity for it this week: RIMM reported its latest earnings on Thursday after the market closed.
I bought puts on Tuesday, and when the market rallied, taking RIMM along with it (thus reducing the price of my puts as well as the delta), I bought more on Thursday. RIMM closed at 64.09 on Thursday, just before its conference call.
Don't ask me how RIMM did last quarter: I don't know and I don't really care. But I know they disappointed both in their top-line revenue numbers ("oh but look at the continued cost-cutting!" the analysts said) as well as their outlook for the next quarter and rest of the year ("they're in a retooling phase, just like the late 90s!" the analysts screeched)*. Ms. Market would have none of this posturing and spin management, and she sold that sucker off by 11-12% in after hours trading. The next morning, RIMM opened at 57.17 (-10.7%), and my puts were up about 80-90%. Hapless investors who haven't yet learned not to listen to analysts started buying the stock up, topping it out at 58.40 (-8.9%) about an hour after the market opened.
|2-day, 5-minute chart of RIMM showing the 11% drop after earnings
I exited some of my puts pretty early, in case the rally had legs, and in doing so I took all of my investment out of the trade - the remainder of my puts were pure profit. Later in the day, as the dead-cat bounce pattern continued to take shape, I exited the rest at a slightly higher price. Total return: 90% in 3 days.
* I distinctly remember reading that exact comment ("retooling phase... just like the late 90s") on Thursday night after the release, on a news item linked from Yahoo Finance. I remember noticing that the related links section at the end of the post included Jim Cramer and other well-known "pundits". I also remember the analyst giving an unequivocal Buy! recommendation based on how he saw the market reacting the next day (he expected a lot of buyers to step in, for some reason). Now that the market has spoken, essentially confirming what the overnight traders knew already, somehow I can't find that article anywhere. Too bad, I would have included a link to it.
CS|MACO: Unnaturally Quiet
First the good news: the AAII sentiment survey for March 23 did indeed reflect a more bullish flock, but insufficiently bullish to make the CS|MACO trade exit the next morning. Meanwhile, SPY rallied above its 25-day moving average, so I now have a Hold signal from CS and a Long signal from MACO. Unless CS goes all the way to Short, or SPY sells enough to get a Flat signal from MACO, I can stay in the trade. SPY is already up nearly 3% from where I bought it on Thursday morning. One of these days I'll do some more formal backtesting and maximum-drawdown analysis so I can leverage this trade up, but for now I'm content to let it just time an unleveraged entry and exit.
The bad news (and here, my poker friend Missy will start snickering if she's still reading) is that I discovered on Thursday that my spreadsheet that does all the calculations and boils the numbers down to Long/Hold/Exit/Short had some serious flaws that caused CS|MACO to miss two entry signals for smallish winning trades this fall. Oops. A craftsman is only as good as his tools, I guess.
The Condor Has Landed
My April Iron Condor managed to finish legging out of its bullish wing at a reasonably good price on Friday, completing the exit of the trade and profiting a nice solid $1.10/contract. I never had to take any risk-management positions - just reduce quantity on the initial position as I worked my way out. I'm looking for a good entry point for the May IC, but volatility is back down in the doldrums again. I'll have to wait until the market gets skittery about something again - if that means skipping until June, so be it.