Too little too late

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How to Front-Run the BB10 Bomb With Options

Well, it has been a good ride for Research In Motion (NASDAQ:RIMM) since November, with the stock doubling in about three months. But now the tech company is fading, off almost 12% in just a few trading days.

We’ll start finding out tomorrow whether the gains will stick or the crash is imminent when the BlackBerry 10 OS hits the market Wednesday. The Jan. 30 Research In Motion event begins an all-or-nothing launch of its new mobile device line — and RIM’s last bid to turn around a declining gadget biz.

I remain convinced that Research In Motion is about to crash back to earth. And if you’re interested in a quick trade on this event, take a look at buying February 8 RIMM puts at $17. Contracts were at $1.79 before the bell — meaning you would need only a 6% drop to reach breakeven on this trade. The market gave back that much in one day of trading to start this week, so it’s a very real possibility.

A longer-term options trade I like is the June 22 RIMM puts at $17. Contracts were $3.91 at the bell, meaning you would target a 20% drop. That’s steep, to be sure, but it’s also more than four months’ time — plenty to find out how badly BB10 went bust, and awfully close to the first Research in Motion earnings report that will reflect these new device sales.

Admittedly, I have riffed on RIM stock a lot over the last few months and looked quite silly amid the rise — as early as this bearish piece in October and most recently in this smartphone stocks recap after great Google (NASDAQ:GOOG) results and a disappointing Apple (NASDAQ:AAPL) earnings call.

But the cracks have finally started to show in the foundation of this rally, and here are the concerns:

  • Momentum Waning: RIMM sold off almost 8% Monday in anticipation of the launch.
  • Experts are Turning Negative: Last week, Citigroup (NYSE:C) said of the rally, “We don’t buy the hype” and put a $6 target on the stock.
  • Rave Reviews Don’t Mean Success: Remember the Palm Pre back in 2009? Remember how Palm stock ran up in anticipation of this gadget … then ultimately collapsed until it was bought by a naive Hewlett-Packard (NYSE:HPQ)? Even if RIMM launches to some decent buzz, that doesn’t mean it will result in profits for shareholders.
  • Why Not Microsoft? The fallback is always that the market can bear a third alternative behind Google Android and Android iOS. But why is the default Research In Motion and not Microsoft (NASDAQ:MSFT) and the Windows Phone? Microsoft has great cash flow, some $66 billion in cash and the same back-against-the-wall desperation over mobile. RIM just has the desperation, with a currently unprofitable business and about $2.7 billion in cash. Seems like Microsoft can afford to wait BlackBerry out — especially considering MSFT is just as enterprise-focused as RIMM.
  • High Short Interest: The big run has undoubtedly been fueled by some short covering as well as bargain buying, but don’t think the short sellers are giving up. Of some 485 million available shares, a stunning 135 million remain held short as of Jan. 15 — more than 28%. So let’s not act like nobody’s betting against RIMM after this run.
  • No Tablet: For all the talk about BlackBerry messaging and tactile keyboards, there is a huge black hole in the RIMM universe that will continue to damage the brand: a lackluster tablet. Consider that the Playbook sold a mere 255,000 devices last quarter after a pathetic 130,000 devices the period before — and if you think all the $500 gadget needs is a new OS, you’re fooling yourself. Meanwhile, Apple sells some 12 million iPads a quarter and Google is estimated to be moving as many as 3 million Nexus tablets in the same time frame. Even if RIMM can tread water on smartphones, it’s missing the tablet revolution.

At the risk of sounding like a stubborn bear who refuses to come out of hibernation, I remain convinced BlackBerry 10 will fail to catch on as much as RIM needs it to. I could be dead wrong and the many short sellers could squeeze Research In Motion even higher, and make me look like even more of a fool.

But the Feb 8 RIMM puts and June 22 RIMM puts, both at $17, seem decent plays for those who want to bet against BlackBerry.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he held a long position in Apple stock.

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