Options Update: Research In Motion Limited Draws Heavy Put Volume

Shares of Research In Motion Limited
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have dropped nearly 3% so far today, as the stock pulls back with the rest of Wall Street.

Headline news for the company is practically nonexistent, with only Jim Cramer’s Mad Money commentary from last night and analyst speculation surrounding Verizon Communications’ BlackBerry sales figures making appearances. Analysts believe that VZ’s report that it sold 1 million units of the BlackBerry Storm bodes well for RIMM.

Meanwhile, Cramer was bullish toward RIMM in his Wednesday edition of Mad Money. “Bulls make money, bears make money, hogs get slaughtered. But I like RIM and I think its sales are strong. Both Apple and RIMM are buys,” Cramer stated.

The analyst speculation and a broad-market rally pushed the stock to a gain of more than 5% yesterday, but Cramer’s comments have been unable to stem RIMM’s decline in today’s trading.

The news has also failed to stem bearish investors from speculating in the options pits. So far today, more than 30,000 RIMM puts have crossed the tape, placing the stock on our Intraday Volume Explosion List. However, sifting through the data reveals that the majority of these put contracts were likely sold-to-open – i.e. the initiation of put-sell positions. Looking at the chart below, you can see that most of the blocks trading on RIMM’s March 55 put have changed hands at the bid price. Furthermore, the volume trading at this front-month contract far exceeds the 6,853 contracts currently open. Combining these factors serves to strengthen the argument that we are seeing the initiation of put-sell positions on RIMM.

Research In Motion option volume details

The Anatomy of a Research In Motion Put Position

Running with this theme, I noticed that 2 blocks totaling 20,000 contracts changed hands at 11:02 a.m. Eastern time at the bid price of $4.60, suggesting that the options were potentially sold to open. The total credit received for this trade arrives at a hefty $9,200,000 — ($4.60 * 100)*20,000 = $9,200,000. Remember that a put-sell trader keeps the premium received on the trade as long as the underlying shares remain above the sold strike through expiration, which, in this case, is March 20, 2009.

By entering this trade, the investor is indicating that he expects RIMM to hold above the 55 level during the month and a half. With the stock bouncing around this level in today’s trading, this is either a very aggressive put-sell position, or there is more to the trade than meets the eye. Given that the size of the position suggests institutional trading, I would bet on the latter. That said, let’s see what RIMM’s technical and sentiment backdrops reveal about the equity’s prospects.

Getting Technical

From a technical perspective, RIMM has performed admirably in 2009, gaining more than 39% on a year-to-date basis. The shares currently enjoy the support of their 10-day and 20-day moving averages, which have helped pressure RIMM steadily higher since the beginning of the year. What’s more, the security is poised to close the week above its 10-week and 20-week trendlines for the first time since late August 2008. RIMM is currently battling technical resistance at the 55 level – a key point of contention for today’s put-selling example.

Weekly chart of Research In Motion since August 2008 with 10-week and 20-week moving averages

The Sentiment Drivers

Sentiment toward RIMM is mixed. Options traders are complacent toward the stock, as its Schaeffer’s put/call open interest ratio (SOIR) of 0.89 ranks near the mid-point of its annual range. Meanwhile, 17 of the 30 brokerage firms following the equity rate it a “buy” or better, according to Zacks. With the potential for both upgrades and downgrades, RIMM’s short-term outlook is considerably muddied.

Sentiment indicators for Research In Motion

The Verdict?

With a battle brewing at the 55 level on the technical front, and wishy-washy sentiment from both analysts and investors, I am not confident in trading any directional move for RIMM at the moment. But that doesn’t mean that you should forget about trading options on the shares. In fact, a put-sell position at the 50 level looks considerably attractive at the moment, given the potential for round-number technical support in the region. While I don’t know the full reasoning behind today’s 20,000 contract put-sell at the March 55 strike, a March 50 put-sell might be more attractive to the every day investor.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.