Synthetic Short Stock Trade on RIMM Is an Interesting Play

03/04/2010 12:01 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Research in Motion Limited (RIMM) dipped almost half a percent lower on Tuesday to $70.55 despite strength in the broader market. This pullback came despite news from Quantcast, which revealed the BlackBerry’s share of the mobile Web market has grown by 7.2% in the past year, while the iPhone has seen its share drop more than 10%.

Good news, bad price action? An investor took this opportunity to execute a synthetic short stock trade by selling calls and buying puts. Around noon ET on Monday, blocks of 5,000 contracts traded on both the April 75 call and the April 70 put, both of which are out-of-the-money options. 

It appears as though the call, trading for $2.66, went off near the bid price, while the put, trading for $3.80, traded at the ask price. Judging from this morning’s open interest translations, it also appears as though this volume traded to open.

If in fact the calls were sold to open and the puts were bought to open, the entire transaction traded for a debit of $1.14 per spread. The profile of this trade looks like a short stock, with significant reward potential (down to the zero mark) and unlimited risk. Profit begins to accumulate in this scenario once RIMM drops below $68.86, or the put strike minus the overall debit paid.

Click to Enlarge

Risk, meanwhile, is unlimited as the stock rallies. At the $76 level, for example, the long put expires worthless, while the short call is in the money with an intrinsic value of $1.00. It will take $100 to buy back the call, which is added to the initial debit of $114 as losses. Assuming this call is uncovered, these losses exacerbate as the stock advances.

Between 70 and 75, both the 70-strike long put and the 75-strike long call remain out of the money and will expire worthless at expiration, making the maximum loss the premium paid of $1.14.

By Beth Gaston Moon, contributor,

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