Trade Update: QCOM-Closing Nov Weekly/Regular 55 Call Calendar for a Gain

by Dan November 3, 2011 9:06 am • Commentary

Trade Update Nov 3rd, 2011 @ 9:35 am:  Last night QCOM reported a strong FYQ4 that slightly beat expectations, but guided their full year 2012 earnings and revenue nicely above consensus.  The stock is up 7.5% on the open, down a bout $1 from the pre-market highs and inline with the implied move.

As for my Nov weekly/regular 55 call calendar that I posted in yesterday, I go the direction right but the magnitude wrong, and frankly in light of TXN and BRCM‘s recent commentary about earnings visibility I did not expect such strong guidance.  While I was not expecting a big sell off, the ideal situation for my trade would have been the stock to settle just below 55 by tomorrow’s expiration…..

As of now the Nov weekly 55 call should have very little extrinsic value with less than 2 trading days left to expiration and the Nov regular will maintain 2 weeks of time value….this is essentially the profit I will make on the spread.

With the stock around $56.30  I want to close this position at .65 for a .25 gain.

QCOM-Report FYQ4 Tonight After the Bell, Quick Preview and A Calendar Trade To Take Advantage of Upcoming Catalysts

-Wall Street analysts are overwhelmingly positive on the name with 33 Buys, 8 Holds and no Sells.

-Stock has performed fairly well this year, up 3.5%, vs the Nasdaq which is down 1/2% . TXN down 7% and BRCM down 20%.

Expectations into the quarter are not particularly high given BRCM and TXN’s recent downbeat guidance.

Barron’s this morning summarized Goldman’s derivative strategists view on the name into what they see as a handful of near term catalysts:

QCOM: Goldman Advises Strangle Options Ahead of Earnings Posted by Tiernan Ray

The options trading team at Goldman Sachs today issued a “trading idea” that suggests you purchase Qualcomm’s (QCOM) November $49/$52.50 strangles at $3.04 going into what the firm rates as “four key catalysts.”

The QCOM strange is reflecting 42% implied volatility, the firm writes, “2 points below 3-month realized.” That means the contract is currently pricing in a move up or down of 7% on tonight’s earnings, which is more than the 6% move, on average, of the last 8 quarters, which may be justified, the team thinks, given the extra “catalysts” in the air.

MY TAKE:  I think there is a very good chance that the qtr is a relative non-event and any disappointment in FYQ4 due to iPhone 4S delay will be made up in FYQ1 with the Apple ramp.

I want to Fade the move into earnings using weekly options and buy the NOV regulars to participate in what I think could be a run up into the company’s Nov 16th analyst day. Here’s the trade:

TRADE: QCOM ($51.53) BUY Nov4th weekly/ Nov19th 55 Calendar Call Spread for .40

-Sell 1 Nov4th (weekly) 55 call at .36

-Buy Nov 19th (regular) 55 call for .76

Break-Even on Nov Expiration(s):

NOV4th (this Friday): if stock 55 or below the Nov4th weekly 55 call that you are short expires worthless and you are long the Nov19th (regular) 55 call for essentially .40.

If stock is 55 or higher this Friday, you max loss is .40 the difference in premium btwn the 2 calls.

AFter Friday Nov 4, with stock below 55 you may want to then consider turning the call that you own into a call spread into the Analyst Day to further minimize risk…but lets cross that bridge when we get to it.

TRADE RATIONALE: the weekly 55 calls are pumped into tonight’s earnings and I am selling an option at a strike that is inline with the implied move….I think any near term disappointment in the current quarter or guidance will be met with enthusiasm at the company’s analyst meeting and I think calendars set up well for this scenario.