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Research in Motion (RIMM) shares closed down Wednesday, under-performing the broader market, which finished near break even. RIMM didn't report any news of its own accord, but investors likely reacted to an ill-received earnings guidance from mobile-phone peer Nokia Corporation (NOK). A large-scale options trader evidently used yesterday's pullback as an opportunity to scoop up some longer-dated call options. Early yesterday, a block of around 7,000 out-of-the-money January 85 calls hit the tape for $1.45 per contract ($145 apiece), for a total premium of slightly more than $1 million paid. While open interest is already 10,000 at this strike, it appears these calls were bought to open, judging from an increase in implied volatility (and the fact that these options have more than six months until expiration).
By the close, these calls settled higher by two cents, compared to a $1.18 decline in the stock. Typically, calls move lower as the stock declines, unless buying pressure has a positive impact on implied volatility.
Profit/Loss:
A long call is a fairly simple option strategy that has a similar profile as a long stock (but more limited risk). If RIMM fails to rally (or even it declines dramatically), the most the call buyer can lose is the premium paid, or $1.45 per call contract. If the stock does charge higher, on the other hand, gains are theoretically unlimited.
Break even at expiration is $86.45, or the strike price plus the premium paid. This is just shy of the stock's 52-week high of $88 and is 40% above the stock's current levels. Remember, however, for these calls and all American-style options, the trader can choose to exit the position at any time between now and when the options expire. Gains in the stock or in implied volatility (between now and options expiration) could translate to gains for the call options.
Beth is senior editor for The Options News Network (www.ONN.tv), which provides daily stock and options commentary. The above comments are not intended as trading advice.
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