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Is AAPL going eat RIMM for lunch?

The Apple iPhone (AAPL) on Verizon (VZ) is a match made in heaven. The single biggest objection to getting an iPhone is that it’s on AT&T (T). (Is AT&T really that bad? I have had it for years and don’t mind it.)

Assorted smartphones. From left to right, top ...
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Nonetheless, people have screamed to get the iPhone on Verizon since it was released. Yesterday, the WSJ broke a rumor that Apple is in development of phones that could work on the Verizon network.

That explains the move in AAPL (up) and RIMM (down) today.

With RIMM earning tomorrow after the close, I am not betting on any direction. In fact, I am betting on both directions. I held a collar trade up until recently. I have adjusted this trade into a Protective Put with double the puts. That gives me 2 put contracts for every 100 shares. Synthetically, this looks like a straddle which will make money in either direction. Also, based on the options pricing, it looks like RIMM is pricing in at least a $5.00 move – either up or down. Given RIMM’s historical performance, this is a pretty reasonable expectation.

It’s important to mention that entering a straddle or strangle now, especially for APR expiration, would be a very risky trade. The “volatility crush” will kill that trade. The current at-the-money straddle is pricing at $7.40. By my estimation, the stock would need to be below $69 and higher than $80, just to break even. To make a profit, you’d need an even bigger move.

If you don’t understand implied volatility, you better not be trading options!

So what is Apple going to do? Is the iPhone going to be on Verizon? I don’t know. There’s lots of speculation. The only thing that I know is that Steve Jobs is a shrewd negotiator and he will do whatever is best for Apple. The real question is: What’s AT&T willing to put on the table to keep the exclusivity?

Bullish on AAPL? I am.

Eric Hale

OptionsANIMAL Instructor

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