Buy RIMM at a Discount… or Get Paid Not To
BlackBerry maker Research In Motion (NASDAQ: RIMM) has been a victim of the Apple (NASDAQ: AAPL) iPhone phenomenon. While it still retains a significant amount of business users, the consumer market has slipped away, and the stock dropped from the low $30s in September 2011 to just above $7 a share.
But if you’re someone who is comfortable holding on to an inexpensive stock to wait for a potential recovery, I’ll show you how to get into RIMM at a 10% discount… or get paid not to.
Cash-Secured Put Strategy
While the typical investor may use a straightforward limit order to buy a stock at a designated price or lower, the options trader can do one better by selling a cash-secured put.
This strategy has the same mathematical risk profile as a covered call. With the put sale, there is an obligation to buy the stock at the strike price if it is assigned, allowing you to get into the stock at a discount. In fact, the true entry cost basis is even lower with the subtraction of the premium you earned when selling the put.
And if the stock is not below the strike price at expiration, then the premium received is all profit. In other words, you’re getting paid not to own the stock.
Research In Motion Rundown
At some point, it is likely that Research In Motion’s intellectual property and the value of the company’s patents will be attractive and the stock will rebound. The one thing we know for sure is that the downside is limited to zero, but a partnership or takeover is a more likely scenario.
As of this writing, RIMM is trading around $7.30. It has held above recent extreme lows at $7.15, and has not been below $7 since the fall of 2003.
There are two rules that cash-secured put traders must follow to be successful.
Rule One: Only sell puts on stocks you want to own.
The intention of this strategy is to be assigned the stock as a long-term investment (each option contract represents 100 shares). So make sure you have the funds in your account to buy the stock at a discount if a sell-off continues. Paying in full ensures that no additional money is needed to hold the stock for potentially many months or even years until a price recovery.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until you are assigned shares at a cost reduced basis. Every month that you keep the premium is money subtracted from your entry price.
Recommended Trade Setup: Sell to open RIMM Aug 7 Puts at 50 cents or better.
This cash-secured put sale would assign long shares at $6.50 ($7 strike minus 50-cent premium), which is more than 10% lower than RIMM’s current price, and would cost you $650 per contract. Remember: Only sell this put if you want to own RIMM shares at a discount to the current price.
And if you do end up owning RIMM, you may want to consider selling a September covered call against the stock to lower your cost basis even further.