Thursday, September 23, 2010

Establish Research In Motion Ltd. Covered Calls

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Research In Motion Ltd. (RIMM) covered calls as follows:

Established Research In Motion Ltd. (RIMM) Covered Calls for Oct2010:
09/23/2010 Bought 300 RIMM @ $46.55
09/23/2010 Sold 3 RIMM Oct2010 $47.50 Calls @ $1.64
The Covered Calls Advisor's current Overall Market Meter is Slightly Bullish, and the corresponding strategy is to establish near-month covered calls at about 2% out-of-the-money. Thus, a limit order was in place to purchase RIMM only if it declined to $46.55 (which is exactly 2.0% below the $47.50 strike price). This order was executed in early trading today. Fortunately, this was the lowest price in today's trading range for RIMM -- and this is the first time since this Covered Calls Advisor blog was started in 2007 that a purchase was made at the lowest price for the day.

Research In Motion Ltd. (RIMM), founded in 1984, designs, manufactures, and markets wireless solutions for the worldwide mobile communications market and is best known for its BlackBerry wireless platform. Introduced in 1999, BlackBerry has found popularity primarily in the enterprise market (large corporations and government institutions), but has recently had success penetrating the consumer market to the point that now about half of total sales are consumer handsets. RIMM has over 50 million BlackBerry subscribers and strong growth continues based on the company's forecast that it will add 5.0 to 5.4 million net new subscribers during the current quarter. BlackBerry handheld units account for 79% of total revenue and services account for the bulk of the remaining sales. The portion of sales obtained internationally has grown to its current level of about 45%.

The Covered Calls Advisor's "Buy Alerts" spreadsheet below shows that the total points of 19.93 greatly exceeds the minimum purchase threshold of 16.0 points for a new investment and the key value and profitability metrics are both very strong. The company's cash flow is also strong, and it has used some of its cash to buy back about 8% of total shares outstanding in the first half of 2010 alone. Additionally (and very importantly), it is investing in future growth via its substantial research and development efforts. One result of these research efforts is expected to be its entry into the burgeoning tablet market. RIMM's product is rumored to be called the BlackPad and its release could be announced as soon as next week.

As part of the background research done on RIMM, the Covered Calls Advisor found these three recent articles to be especially worthwhile in confirming the current value available in purchasing RIMM stock:
1. The Peridot Capitalist blog
2. Barel Karsan Value Investing blog
3. Trefis' RIMM valuation article

Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for the RIMM transactions would be as follows:
Stock Purchase Cost: $13,973.95
= ($46.55*300+$8.95 commission)

Net Profit:
(a) Options Income: +$480.80
= (300*$1.64 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $46.55):
-$8.95 = ($46.55-$46.55)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $47.50): +$276.05
= ($47.50-$46.55)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $46.55): +$471.85
= (+$480.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $47.50): +$756.85
= (+$480.80 +$0.00 +$276.05)

Absolute Return if Unchanged at $46.55: +3.4%
= +$471.85/$13,973.95
Annualized Return If Unchanged (ARIU) +53.6%
= (+$471.85/$13,973.95)*(365/23 days)

Absolute Return if Assigned at $47.50: +5.4%
= +$756.85/$13,973.95
Annualized Return If Assigned (ARIA) +86.0%
= (+$756.85/$13,973.95)*(365/23 days)