$RIMM is having yet another great day, shedding 4.38% and making new relative lows. It’s not looking too appealing from the technical side of things:
On top of that, the volatility skew in the options market has switched to a smile, and a fairly steep one at that (courtesy of LiveVol).
I think we’re coming into a point where the short trade is no longer the easy one and there may be event-based risk to the upside related to the company’s patent portfolio.
Now before all the internet trolls takeover the comments, keep a few things in mind:
- I’m not a long term bull on RIMM. Best case is that it pulls a $CSCO and acts as a big ass ship trying to turn around in a canal. Any bottoming process will take a lot of time
- I think software patents are absurd and need to be abolished, they hurt innovation and the US would be better off without them.
- I’m not a value guy, but I will trade on news and sentiment around valuation
- The options market is more than long/short, if you don’t know how to make an opinion besides direction then you’re on the wrong website
- These are all back of the envelope numbers, do your own DD
On to the numbers.
RIMM’s market cap currently is around 6.27B.
It’s got 1.77B in cash, which leaves about 4.5B of “value.”
So what kind of value can we pull out of this?
Back in September, Jeffries put out a note that if liquidated the patent portfolio could be worth around 2.5B, and if sold or licensed it’s worth around 1B.
I don’t know about that estimate, I’m not sure that the patents hold up in current technology. If all they have is GSM/UMTS based patents and we’re off to WiMax or 4G, then valuations could head lower. Some other measures suggest a range between 1B and 3B.
Assuming the 2.5B that leaves us with 2B of stuff that we have to account for. That’s about 1/3 of current market cap.
Back to the stock price. By putting this into a complicated excel spreadsheet, we see that 1/3 off a share price of 12 is about $8.
Rattling the Sabers
I don’t think that they have to actually sell their patents or even license them… all they have to do is threaten to do so.
It’s very similar to when beaten down companies release some PR saying they are “exploring strategic opportunities” or some BS, enough to scare off the shorts for a few weeks.
AOL sold their patents last month and saw a move from 18 to the mid 20s. That’s the upside risk the options market is looking out for.
What to Play
Any trades here? You can sell the Jul 11/10 1×2 spread for a credit of about 0.25. If you actually got assigned, that would put your basis at about 8.75, which then could be rolled to a covered call. Also if the skew flattens, you make money, and it’s positive theta.
Needless to say this trade is a bit more advanced, and it is a knife-catcher, so trade at your own risk.