In an episode of CNBC’s Mad Money last week, Jim Cramer expressed caution toward Research in Motion Limited (NASDAQ: RIMM), saying he doesn’t expect a comeback in the shares anytime soon. At the time he discussed the shares, they were trading at $71. When a market pundit sends out comments like this, investors who use options can try many different strategies, as opposed to just buying or selling the shares outright. Here’s an example of some ways that options investors might follow or rebel against Cramer’s opinion. These are not buy-sell-hold recommendations – just some potential strategies that fall into the bullish or bearish camps.
Those who agree with Cramer and expect downside (or at least limited upside) in RIMM might be trying to buy intermediate-term put butterfly spreads by buying the June 80/65 put spread and simultaneously shorting the June 65/60 put spread. Essentially, this butterfly consists of one long June 80 put, two short June 65 puts, and one long June 60 put. This spread is currently trading near $6.70, and that debit plus commissions is the maximum risk to this strategy, while the maximum reward is $8.30 minus commissions. This spread will be profitable if RIMM shares are trading below $73.30 at June expiration.
On the flip side, investors who don’t agree with Cramer’s skepticism could be buying bull call spreads. Investors would do this by, for example, buying April 60/75 call spreads for $9.30 each, which is the maximum amount they can lose (plus commissions). The maximum profit is $5.70 per spread, or the difference in strike prices minus the premium paid. The call spread will be profitable if RIMM shares are trading higher than $69.30 at April expiration.
Options give people options, and these are just two of the many strategies that people employ to reflect their investment opinion.
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