Friday, January 20, 2006

RAMBUS -- What goes up must go down? Or maybe up some more...

RAMBUS (RMBS) has merely doubled in the last month--on nothing more than news. A design win here (AMD) , a favorable lawsuit ruling there, an analyst's upgrade with a $936M in revenue upside ($157M actual in 2005). The earnings announcement yesterday was a yawner-- 9 cents a share instead of the one analyst's estimate of 8 cents. The stock did nothing on that news. So with a PE ratio of 117 (compared to Google's stogy 96) what should we look for on this stock?
I'm betting that it will not just stay stuck at 34 like it is right now. I sold 1000 shr short (at 34.43) and bought 12 Feb $25 Calls (at $1043 apiece). The delta right now on this combination is 1 -- at this price any change in the price of the stock will cause offsetting changes in the shorted stock and the call. However--if there is a reasonably big move (a couple of points) things get interesting. On the upside the delta on the calls will move from .89 towards 1 and the position moves into the black. On the downside the value of the options drop, but at a decellerating rate as the delta of the options drops. The profit /loss Shorted stock of course moves dollar per dollar with the stock. Right now I am wondering if I should set up a standing order with my account to close out the position if the stock moves sharply in one day (as it did the day I opened this position). One other comment, the volatility of the call options dropped significantly after the earning report--from around 100 to 90. Not surprisingly since there is less uncertainty about the stock. This might be a behaviour to exploit-if you are short on the options, not long like I am now.

No comments: