New Trade Alert for (BBRY)
Blackberry Buy BBRY January $5 Call @$2.50 or less
Risk Rating: 2 (1 = lowest 5 = highest)
Above Break Even Probability: 46%
Max Loss Probability: 17%
NEW ALL TIME FOREVER record highs in the NDX Nasdaq 100 index were posted in December with a price free fall to start 2016.
The double digit percentage drop did find a bottom for an epic bounce back, not to the extent of the S&P 500 and DOW, though Tech is still negative for the New Year.
The NDX still stands at minus 2% with work to do to go Green in 2016.
A onetime technology star, Blackberry has been beaten down 23% YTD. The low share price and brand value possibilities to unlock puts reward to risk on the bulls side.
BBRY has tracked mainly between $7 to $8 for most of the last nine plus months. An upside breakout targets $9 which is nearly 30% above.
Extreme lows in 2013 were posted at $5.44. Bullish divergence with new price annual lows near $6 in September and no new highs in volatility suggested sellers had tired.
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development.
The January option has nearly ten months for Bullish development.
An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Up Potential with Limited Risk.
A Blackberry long call option can provide the staying power in a potential bullish trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from only modest directional moves.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With BBRY at $7.10, for example, an In The Money $5.00 strike option currently has $2.10 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to profit. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the BBRY January $5 Call at $2.50 or less. A close in the stock below $6 on a weekly basis for two consecutive weeks would trigger an exit.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with a much less money tied up in the investment. The Delta on the $5 strike call is 85%.
The January option has almost ten months for bullish development. This option is like being long the stock from $5, solidly below the decade low at $5.44, with completely limited risk.
The maximum loss is limited to the $250 or less paid per option contract. The upside, on the other hand, is unlimited.
The Blackberry option trade break even is $7.50 or less for the stock at expiration ($5 strike plus $2.50 or less option premium). That BE level is less than 50 cent higher.
If shares move above the $9 modest measured move objective the option would be worth $4.00+ for more than a 50% gain.