BBRY – When the Option Market Gets It Wrong

For several of the classes we offer at the Options Institute we have follow up webinars.  Yesterday I was discussing earnings announcements and options when one of the students popped in a question asking what I thought of Research in Motion (BBRY – ) going into earnings this morning.  I responded by stating (as she knew) that the exchange frowns (very light word here) on me making a recommendation, but I did run through what the option market was saying about BBRY yesterday before the company’s earnings announcement this morning.  To say the option market got it wrong is an understatement.

Using closing prices BBRY finished the day at 14.56 so the 14.50 options would be the closest strike options and the at the money contracts.  With BBRY having weekly options, the BBRY Mar 28th 14.50 Straddle was a good indication of what sort of price change the option market was expecting from BBRY today.  This straddle was priced at 1.83 (Mar 28th 14.50 Call at 0.95 + Mar 28th 14.50 Put at 0.88).  Using this as an indication of what the market was looking for as a range of movement a 12.56% (1.83 / 14.56) move was priced in by the options.  Based on history this 12+% move was not unreasonable.  Last quarter BBRY dropped over 27% after their earnings release.  The average move (higher or lower) has been just under 12% for the last eight quarters and this may be where that 12.56% was coming from.

The close to close outcome was a bit less than 12.56%.  In fact it was about 12% less than that figure as after a tumultuous day BBRY was down 0.12 to 14.44, a drop of 0.84%.  This was less than any of the price changes over the past two years.  Admittedly on the open this morning BBRY was at 15.18 up 0.61 or about 4% but the stock gave that all back over the course of the day.  Also, this opening price was much less than what the buyer of a straddle was expecting.   On the open the straddle was worth about 0.72, less than half the closing value the evening before.  On the close today, the straddle was worth a whopping 0.06, quite a drop from yesterday’s close.