3 Ways to Play Research In Motion With Options

As I've noted before, I'm a cautious bull on the stock market, and reflecting that mentality, I took a bullish position in Research In Motion (RIMM). The VIX is hovering at sky-high levels, and implied volatility readings on individual stocks are through the roof. Therefore, rather than buying the stock outright I decided to sell puts on RIMM. In addition, I'll outline two covered call plays on RIMM.

Here's the math:

I sold the November $30 put for 71 cents. In others words, if the stock is below $30 on November 23, I will be forced to buy the stock for $30 a share. If that happened, my net cost basis excluding commissions would be $29.29 a share, a whopping 36% below the current stock price of $46.

Given the slowing economy, RIMM won't see its earnings growth exploding the way it used to, but the stock is trading at just 13 times expected full-year earnings of $3.60 a share. And let's say that number comes down by 15% to $3.06 a share, my buy point is $29.29 a share, and 9 times earnings seems like a fair price for RIMM. Keep in mind that the company also has $3 a share in cash on the balance sheet.

The maximum profit on the trade is $71 for each contract I sold (not telling how many!), with a total potential loss of $2,929 per contract if the stock went to $30. Of course, I don't see RIMM going anywhere near $30 in the next month let alone $O, and if I went long the stock outright, I'd have significant risk anyway. RIMM options are also very liquid, so I can get out pretty much any time I want.

With that out of the way, let's look at two potential covered call plays:

Trade #1: Long RIMM stock, Short November $50 call for about $3.45

This brings the cost basis of buying RIMM down to $42.23 a share, with potential upside to $53.45 ($50 + $3.45).

Trade #2: Long RIMM stock, Short November $45 call for about $5.85

This trade, which I actually like better because it is more conservative, creates a long RIMM position with a cost basis of $40.15, with upside capped at $50.85.

That's it for now. I plan on posting more trading/investment ideas in the coming days, so stay tuned. Good luck out there!

P.S. I was stopped out of my AMZN short at a loss. Must stop daytrading. Now.

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