Thursday, September 24, 2009

Collar Up RIMM Profits

Research in Motion (RIMM) is reporting earnings after the bell and if you are holding stock that you want to hold on to I think a great way to protect yourself is to "collar it up" by selling a call and buying a put.

RIMM has had a nice run and with the market pulling back it could see profit-taking after earnings. The implied volatility is around 64% in Oct and 53% for Nov. If the skew was much greater than this between each month I would consider buying a calendar spread in RIMM or even a double diagonal. If I were long stock I would advise selling a 95 call and buying a 75 put for nearly even-money. You sell the 95 call for 1.70 and buy the put for 1.70. Net-net its a zero cost collar and protects you to the downside if RIMM tanks. If it rallies thru 95 you simply get called away at 95 at Oct expy.

If I were not holding a position in the stock I would consider selling an iron condor with wide enough strikes to be cushioned against a big move in RIMM after earnings, which often happens as you can see the last several quarters. If I had a gun to my head I would consider the 70/75/100/105 Oct iron condor short. But I am not officially putting this on as the RIMM earnings move are too volatile for my blood.

Adam Warner of Daily Options Report has some interesting thoughts on RIMM earnings as well.

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