Thursday, June 18, 2009

RIMM Double Diagonal

Research in Motion (RIMM) earnings are due out after the bell and it is sure to move afterwards. RIMM has moved up or down 11% or more in 7 out of the last 8 earnings reactions. With 3 of those seeing moves greater than 21%. So we know its a mover and a shaker. The implied volatility in June is absolutely screaming lately and today sits around 170% level. To contrast, July IV is way down at 70%. So in this case it would be best to try and sell the juiced up front month premium.

The stock has been on a bullish tear lately until this past week when it retraced from 86 back down to the mid 70s. If I had to guess a direction I would say its probably a buy after this pullback but thats the beauty of options; we don't have to pick a direction if we don't want to.

So what's the trade? I want to use a complex strategy called a double diagonal spread.

Buy the JULY 95 call and JULY 65 put, and sell the JUNE 90 call and JUNE 70 put.

Net debit of $1.34.

Profit zone roughly between RIMM stock at 67-97.

This trade takes advantage of a volatility collapse in June options which will come Friday morning. The June options are very expensive relative to the July's. While the profit zone is wide, the max profit of roughly a triple occurs if RIMM settles Friday at 90. Overall this is a great looking non-directional trade going into a coin flip earnings report. The other thing I will note is that since you have a calendar spread on a diagonal strike basis you can always cover the Junes and hold the one leg of the long July options that the market trades to and manage the position into July.

Whatever you do, this is surely a better trade than simply buying June premium, which is what the amateurs will be doing.


Mark Wolfinger said...

There is nothing complex about a double diagonal spread.

It just an iron condor with two calendar spreads.

In fact, I have a post on DD that's going live tomorrow (6/18/2009) morning.


Jason said...

Hi Mark,

Yeah I realize what you mean but to the option rookie, anything more than straight calls or puts can be complex so I wanted to point that out.

Anywho, thanks for reading. I enjoy stopping by your site and I learned quite a bit from it when I first got into options.


Gregory said...

Hi Jason

first of all sorry for my english...

My question is if you made the trade yestarday o a few days ago????

I agree with Mark, Is not an complex strategy ...

Nice Blog