June 24, 2010 / 6:34 PM / 9 years ago

Options investors brace for erosion in RIM shares

* RIM reports after market close; expect volatility

* Investors scoop up puts, sell out-of-the-money calls

* Front-month straddle implies 11 pct move by July expiry

By Angela Moon

NEW YORK, June 24 (Reuters) - Options investors appeared to be bracing for more deterioration in shares of Research in Motion Ltd RIM.TO when the Blackberry maker reports results after the market close on Thursday.

RIM shares tend to be volatile around earnings reports, and of late the news has tilted toward the bears’ favor. In the past four earnings periods, shares of RIM dropped as much as 17 percent and rose as much as 10.3 percent one day after reporting earnings.

The stock RIMM.O was down 1.1 percent at $59.00 in early afternoon trade on Thursday; it has lost 22 percent since a 2010 closing high of $75.94 on March 11.

The latest consensus has analysts and investors eyeing earnings of $1.33 a share, on revenue of $4.32 billion, according to Thomson Reuters.

Roughly 1,500 puts were purchased at the July $60 strike for an average premium of $3.91 so far on Thursday while 2,200 calls were sold at July $60 strike for a premium of $2.98 a contract, said Caitlin Duffy, options strategist at Interactive Brokers Group.

“There is a bearish slant ahead of earnings with options investors scooping up put options and selling out-of-the-money calls,” Duffy said.

“Investors may be expecting a continued erosion in the price of the underlying shares following earnings by purchasing the low in-the-money puts.”

She said call-sellers may be throwing in the towel on RIM by closing our their long positions, or could be initiating outright bearish bets that RIM’s shares will not rebound about $60 ahead of July expiration.

RIM sees its gross profit margin at 44.5 percent and the average price of its phones at $305 to $310, slightly below the 45.7 percent margin and $311 average selling price that it recorded in the prior quarter.

Beth Gaston Moon, senior editor at Options News Network, said recent action hasn’t been all bearish, with “aggressive” call buying in front-month contracts on Wednesday.

“The July $75 call, out-of-the-money by about $15 with just over three weeks until expiration, went into the session with open interest of fewer than 5,000 contracts and saw more than 40,000 contracts trade throughout the day ... suggesting they were the work of call buyers purchasing these to open,” she said.

Moon said front-month, at-the-money straddles (where a call and put option are purchased at the same strike price) at the $60 strike was priced at $6.90. This implies a move of 11.6 percent in either direction between now and the July options expiration.

Options implied volatility on the stock was only slightly higher by 1.6 percent to 53.94.

Reporting by Angela Moon; Editing by Padraic Cassidy

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