A Nostalgic Trade for a Nostalgic Time of Year
Nostalgia is defined as “a sentimental longing or wistful affection for the past, typically for a period or place with happy personal associations.” That sums up the holiday season for many. But there are many other nostalgic times in most of our lives.
Sometimes, in this modern world, nostalgia even involves technology.
Of course, none of us truly wants to go back in time and seek a simpler technology. We certainly need our smartphones which replaced our earlier mobile phones, GPS devices, cameras and for many, a laptop.
But, that doesn’t mean we don’t smile when thinking of those simpler times when we typed with our thumbs in many cases.
Blackberry Changed the Phone, Forever
In 2000, Blackberry, then known as Research In Motion Limited, released the first phone with a keypad. This handset had been designed to allow typing with the thumbs. It was meant to be a personal assistant, and it was soon widely adopted by both government agencies and large businesses.
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The Blackberry became a common sight in airports and in cities. But, it was quickly replaced by the iPhone and other devices that offered flexibility because Blackberry limited connectivity to its network. This increased security, but decreased its acceptance. It proved to be a near fatal error for the company.
The rapid rise, short lived success and dramatic decline of Blackberry can be be seen in the company’s stock price which is shown below.
The next chart demonstrates, in some ways, the wisdom of Wall Street. The stock price is shown as the solid orange line. Revenue is shown as the bars. The stock price peaked well ahead of revenue indicating investors understood the company’s prospects were dimming even as sales were rising.
The stock price has been in a downtrend since 2008 and has never recovered from the bear market. The business is unlikely to ever recover to its former highs, but for investors, the question is whether or not the stock is undervalued.
Blackberry (BBRY) Offers Value
At its current stock price, the company is trading for about twice its book value. Other companies in the industry are trading at an average of 5 times book value. This is one indicator that the company is undervalued.
The company’s financial statements also show that Blackberry has been paying down debt. Long term debt is down almost 60% in the past three years. It also needs to be noted that sales are down by about the same amount over that time.
However, the stock chart does show some bullish indicators in the short term. The daily chart is shown below with a momentum indicator known as MACD at the bottom of the chart.
The price action is generally bullish. The stock has jumped on news twice in the past six months. Earnings reports have pushed the stock up and the price then drifted lower. The price remained above its level of the previous quarter, a fact which is bullish to technical analysts.
MACD is also turning bullish. This indicator is considered bullish when it is above 0 and bearish when it is below 0. On the daily chart as shown above, trends tend to be fairly short in duration. That means this indicator is most useful for short term trades. Options traders may find this indicator particularly useful.
The chart shows the stock appears to be at the beginning of a new up trend that could carry the price back towards $12 where resistance should be expected. This resistance dates back to 2013 and could prove to be difficult to overcome.
Once resistance is cleared, the stock could rally sharply. BBRY could also benefit from its appeal to value investors. There is also a remote possibility the company could be attractive to a competitor.
That indicates traders should consider strategies that provide bullish exposure to the stock.
To benefit from potential gains in BBRY that are expected over the next few weeks to months, an investor could buy shares of the company. This requires a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
A Specific Trade for Blackberry (BBRY)
For BBRY, the December 15 options allow a trader to gain exposure to the stock through the expected period of seasonal strength.
A December 15 $12 call option can be bought for about $0.55 and the December 15 $13 call could be sold for about $0.20. This trade would cost $35 to open since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $35.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in BBRY the maximum gain is $0.65 ($13 – $12 = $1.00; $1.00 – $0.35 = $0.65). This represents $65 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $35 to open this trade.
That is a potential gain of equal to 185% of the amount risked in the trade. The trade could be closed early, immediately after the earnings announcement, if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.