Research In Motion (RIMM), the maker of BlackBerry smartphones, is due to report quarterly earnings Thursday, June 18, after the market close. An examination of RIMM options ahead of this earnings report is a useful case study of pre-earnings options pricing. RIMM options are expensive right now -- very expensive. The June at-the-money options are priced at about 150 implied volatility, even though they expire Friday. Why? Because the company reports earnings Thursday evening.

You can see on the following OptionVue volatility graph that RIMM options implied volatility (blue line) are trading way above its current statistical volatility (brown line). As of the June 16 closing data, implied volatility was around 65% on average versus stock volume of around 40%. So the time premium on RIMM options is very expensive right now, one might call it "juicy." So are these juicy premiums an "automatic sell" ahead of earnings, banking on a volatility implosion after earnings? Not necessarily.

RIMM Implied and Statistical Volatility Chart


RIMM has a history in the recent past of volatile reactions to earnings, in both directions. In the table below, I examined the last six RIMM earnings reports. You can see that the stock has made big moves in both the one and five trading days following earnings. The one day reactions alone range from down 27.5% to up 20.8%; the lowest one day move was 5.9% (close to close basis). The average move over the data surveyed was plus/minus 14.9% for the day following earnings, and 17.2% for the 5 trading days after earnings.

I captured the RIMM option prices today on June 17, one day ahead of earnings. They may be very different tomorrow before the earnings are due. But in the current pricing data, with the stock at 76.90 and down on the day, the June 75 Straddle was priced at around 8.50. This is an astounding implied volatility of around 152%, with only 2 trading days left until expiration. But more importantly for our purposes, this at-the-money straddle is pricing a move of about 11.1% on the shares.

Although this is a fairly small sample size, you could say in a way that you are getting 4% underlying stock move "edge" buy possibly buying the June at-the-money RIMM Straddle at these prices. If RIMM moves 15% the day after earnings for example, the shares would move about 11.50 on these prices (versus paying 8.50 for the straddle). If RIMM only moves 5%, which is the low end of the range, that equates to a move of around 3.85. So this is certainly not a "risk-free" trade, but it is an example of how extremely high option volatility and premiums cannot automatically be considered to be a a "sell."

RIMM Earnings Reaction Table


On the following RIMM daily chart, you can see the massive gap that occurred after the last earnings report, when the stock gapped up about 10 points (20%) on the open.

RIMM Daily Chart


Could RIMM implied volatility "implode" after this week's earnings report, dropping sharply? Certainly. The July and further out months may see a sharp drop in option premiums. The June options, which expire Friday, will basically become dollar-for-dollar as expiration approaches.

There are other advanced strategies that investors/traders can consider in situations like this, such as buying June options/selling July options. There is no definite guaranteed risk-free strategy when trading ahead of a news event and expiration. But it certainly shows that option prices should be looked at from a variety of angles by the advanced option trader. It will be interesting to track where the RIMM at-the-money June straddle is trading at tomorrow (likely will be lower premiums than today), and where it goes out on Friday's close.

Price Headley is the founder and chief analyst of BigTrends.com.