Research In Motion: Analyst Upgrade Provides Profitable Option Strategy

Goldman Sachs just upgraded one of the poorest performers in the market this year, Research in Motion (RIMM). Although it went only from a hold to a sell, it was an important inflection point for RIMM. Goldman changed its valuation criteria for RIMM to a sum of its parts method. It valued RIMM’s services business at $4.8B, its intellectual property for $3.4B and its cash on hand at $1.4B. In total, Goldman values RIMM at $9.6B for a share price of $18 a share, just about its current level. I think this puts an important floor under the stock and one that can be played profitably via options to limit any downside given the challenges RIMM still faces.

Option Strategy: Sell the Jan 12 $17.50 puts and buy the Jan 12 $16 puts via a bull market put spread for a net credit of 60 cents.

Scenario 1: RIMM holds the $17.50 level or rises from current price level when the option spread expires in January 2012. In this probable scenario, I make my 60 cent share spread while only tying up 90 cents of collateral in my brokerage account.

Scenario 2: RIMM continues to decline but doesn’t implode. In this situation, I acquire RIMM for a price adjusted $16.90 a share while limiting my maximum loss during the time of the option spread to 90 cents a share.

Scenario 3: RIMM continues to get crushed and heads to the single digits. Given its assets, I think this is not that likely. However, if it does happen I can get out for the 90 cents so my downside is very limited given the possible profits in a short time period and the assets RIMM still has.

4 reasons RIMM to have a foundation at $19 a share:

It is selling at the absolute bottom of its five year valuation range based on P/E, P/S, P/B and P/CF.

With its patent portfolio and enterprise customers, RIMM would be a good acquisition for another player in the space. At the very least, speculation should provide a bottom for the stock.

It looks like RIMM is starting to build a bottom near this level (See Chart).

RIMM is dirt cheap with $2 a share in net cash, a forward PE of just 4 and goes for three times trailing cash flow.

Disclosure: Long RIMM through option strategy outlined in article.