The market took Research in Motion (RIMM, $96.20, down $2.07) below $100 yesterday as the stock fell over $7 and is continuing lower this morning. The stock hit $110 earlier last Friday and we closed the October 120 calls (RULJD, $2.36, down $0.41) at $5.50. Two call options were purchased for every one put option. The entry price on the calls was $3.22 each.

We booked a 35%-40% profit on the call options and we still had the October 80 puts (RFYVP, $3.30, up $0.57) to play with. Our entry price for the put option was $1.82. You can sell them now or place a stop of $3.00 on them. A stop of $3.00 gets you a little over a 50% gain.

Our entry price was $8.26 ($3.22 x 2 + $1.82) for the two calls and one put. Since we sold the calls at $11.00 ($5.50 x 2) and are getting at least $3.00 for the puts that puts our exit at $14.00 for the entire trade. Quick math gives me a 75% return.

The trade was another example on how to use strangle options in your portfolio. They have been working well in the current market environment but remember they are only good for stocks that make huge moves.

Rick Rouse
Rick@OptionsMentoring.com

Research in Motion (RIMM, $104.61, up $5.31) made a 5% move yesterday and hit a high of $106 after intoducing a BlackBerry flip phone. Wall Street liked the news because it means RIMM will have the phone ready for the holiday shopping season. The company will also debut the BlackBerry Bold later this month.

I’m not sure if we caught RIMM at its bottom which is why we hedged our trade and so far it has been working. We looked at the October 120 calls (RULJD, $4.10, up $1.10) and the October 80 puts (RFYVP, $1.64, down $0.87). The calls were at $3.22 and the puts were going for $1.82. We used two calls for every one put. This gives us a total entry price of $8.26 ($3.22 x 2 + $1.82). At current prices we get a total of $9.84 ($4.10 x 2 + $1.64). That’s a 20% gain if you closed the the trade yesterday. That’s a sign of a savy investor.

Another option (no pun intended) you could have created for yourself is if you would have sold the calls at $4.10-$4.15 which would have given you a net of $8.20-$8.30 or enough to cover the original cost of the trade including the put option. Then you would have had the luxury of having a totally risk-free trade in RIMM. If RIMM suddenly breaks down from here and heads back below $100 then your puts will rise. If RIMM keeps going higher then you either sell the put or simply wait. Again, it all depends on what you want to do.

We are targeting the $5.50-$6.00 area for the calls so we will see how today goes. The stock will still be choppy but the options don’t expire until October 17…plenty of time.

Rick Rouse
Rick@OptionsMentoring.com

Wow. Talk about a beating. Research In Motion (RIMM, $123.46, down $18.88) got one yesterday, falling 13%, after the market digested its earnings report. The stock peaked as high as $148 just a week ago, and has now fallen to its lowest level in two months. The stock was down another $1.26 in after-hours trading to $122.00.

Yesterday was a bad day for RIMM and only time will tell if current support will hold at the $120 level. I mentioned on Wednesday that the stage was set for a big, big move either way and we got just that. If you played a strangle option trade with the two options I mentioned then you now have a decent profit. The July 130 puts (RULSV, $9.85, up $5.93) were the big winner as they easily more than doubled from an entry price of $3.90.

The July 150 calls (RULGJ, $0.40, down $5.00) fell over 90% but here is the beauty of this trade once again. The entry price for both contracts came in around $9.30, $3.90 for the puts and $5.40 for the calls. The puts are worth $9.85 and the calls are worth $0.40 so the value of the two is $10.35. This gives us nearly a 10% profit in one day. Ten contracts would have made you over $1,000 in one day.

With RIMM trading lower in after-hours, here’s the plan. Since the puts are now deep in-the-money, they will move dollar for dollar if RIMM keeps going lower. We can close the puts today and bank those profits which would guarantee at least 10%. We would keep the call options open since they are nearly worthless but have the chance to rebound if RIMM can make a furious comeback over the next few weeks. We have created a risk free opportunity to make even more money if RIMM rebounds. Even if these calls expire worthless a 10% gain is a guarantee. That might not sound like much but if you can make 10% a day or even in a week then you are well ahead of the game. I’m not sure where RIMM will open this morning but let’s hope it continues lower then hope for a big rally by July 18 which is when the July options expire. [Note: Apple (AAPL, $168.26, down $9.13) fell 5% in sympathy yesterday]

Rick Rouse
Rick@OptionsMentoring.com