Has Research in Motion Found a Bottom? (NASDAQ:RIMM)

After losing over 40% of its value since late September 2009, shares of Research In Motion Limited (USA) (NASDAQ:RIMM) are looking for a bottom. Speculating investors may want to take a cautious approach by using a covered call to hedge a long position in RIMM to lock in some profit upfront. Read on for a good approach.

Based on rates recently checked, buying 100 shares of Research In Motion Limited (USA) (NASDAQ:RIMM) for $49.14/share and then selling the $47.50 August 2010 Call contract for $3.70 could net you 4.53% profit if RIMM closes above $47.50/share at the expiration date in 44 days. Not bad for 1+ months of investing and your average monthly gain would be 3.14%. Additionally, you would have a big downside protection to $45.44, or about a 7.5% drop in stock price. The Compound Annual Growth Rate (CAGR) on the assigned option position is 44.4%, which is pretty solid.

Possible Strategy if RIMM drops 7.5% and closes below $47.50:

If RIMM closes below $47.50 at any time during the trade, you can roll down the position by purchasing back the $47.50 August 2010 Call contract and then selling another call at a lower strike (say the $45.00 strike) and/or further date out to make up for any losses caused by having to buy the $47.50 August 2010 Call back. If the stock recovers, you likely can simply sell out of the position for probably close to even money if you don't want it tied up in the positions.

If shares of Research In Motion Limited (USA) NASDAQ:RIMM) continue to drop, you now own the stock for less than $45.44/share when you were originally interested in buying at $49.14/share. That is a pretty good deal for investing.