Options in the smart phone wars

In options lingo, traders often refer to “at-the-money options” as a coin-toss. They mean that the odds of a soon-to-expire option landing in the money are about even. The event has a binary outcome: Either it will or it will not land in-the-money. The ongoing value of the option or its sensitivity to the changing price of the security upon which it is based is known as its delta. An at-the-money option, therefore has a delta of approximately one-half.

And so it was with interest that we read some recent insight from Blackberry CEO John Chen as he described his nascent turnaround strategy as having a 50-50 chance of success. In an interview with the Financial Times, Mr. Chen said his strategy stood an even chance of failure, although he remained optimistic about the future of the company. At first blush the headline seemed a daring admission of failure, but when you put it in options terms, you can see that the CEO at the troubled smartphone maker is actually in a pretty decent spot – right on-the-money – so to speak.

We recently noted sizable options activity in our IB Traders’ Insight column when the shares were rising towards $10. We considered the likely traction the stock might gain should it start to trade back above a double-digit price. However, there are plenty of analysts who had written-off the fortunes of Blackberry as it appeared to be losing the smartphone war. Among the 43 analysts surveyed by Bloomberg, only three (or 7%) rate shares a “buy” while 14 rate its shares a “sell”. The remaining 60% rate its shares a “hold”, which judging by their price forecasts is a polite way of siding with those crying “sell”.  According to the consensus prediction its 12-month forward price target is $7.50 or 25% below its recent closing price of $10.10.

Certainly Mr. Chen has his plate full and having successfully orchestrated the turnaround of database software business, Sybase, before selling it to SAP, acknowledges the cultural complications at Blackberry as well as recovering from the loss of key enterprise clients. Such clients tend to be stickier only as long as you can deliver good products and services. Mr. Chen told the Financial Times that, “achieving financial stability is much easier than growing the business on to a different level.”

Chart 1 – June expiration – typical bell curve on display


And so it is of interest to us to review what options prices are hinting about the outlook at Blackberry. The market implied share price based upon the June 2014 option series exhibits a normal bell curve Probability Distribution (PD). The coin toss outcome in this case suggests a share price around $10. Note that the cumulative distribution implies that there is a 54% chance that shares in Blackberry will close below a price of $10.00 by June 20. There’s nothing unusual about that. On a micro level it suggests investors are comfortable with management and its strategy and that financial stability will return in the short-term.

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