We spent the day thrashing around in expiring Research In Motion puts and calls, which turned lethal after the close. The stock had climbed steadily throughout the session, settling at 108 with a quite respectable gain of $6 on the day, But that was before news came out immediately after the bell that RIMM had beaten by three cents a supposedly over-the-top street estimate of 62 cents per share. Within minutes, a short-squeeze panic developed that pushed the stock $11 higher to a peak at 119.45 that may have been surpassed by the time you read this. (Click on chart to enlarge) Seldom have we been so tempted to short expiring options willy-nilly, since implied volatilities were as high as we have seen them in more than 30 years of trading. In fact, December option volatilities were around 240 ' about four times what we might expect for a 'typical' $100 stock that is traded mostly by nut-jobs. But with December expiration just hours away, who could resist the temptation to sell, say, December 115 calls for $175 apiece that were seven dollars out-of-the-money!? Well, anyone who took this sucker's bet would be in pain right now, since the stock at its evening-session high would have made each and every Dec 115 call shorted for $175 of "free money" a $200 loser. Greed Is Good -- Up to a Point We had begun the day ourselves short some December 100 straddles for 10.20 ($1020), but we were protected above 110 by some December 110 calls we'd acquired as an afterthought for 2.00 ($200). This meant the worst we could have done per combo was to lose $180, versus a maximum possible gain of $820. Not content with such fat odds, we greedily shorted some December 90 puts for good measure,
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