New Trade QCOM – Put Calendar Speaks to Me

by Enis November 5, 2012 1:41 pm • Commentary

Dan is our resident technology expert.  He’s traded the sector for more than a decade, and knows each sub-sector inside out.  When I venture into the technology names, I usually do it with a volatility bent in mind, rather than a strong fundamental view.  Because traders like Dan would eat my lunch on any fundamental trade.

So when I took a look at QCOM options today, I wasn’t expecting to initiate any new trades.  But lo and behold, Jan13 stuck out like a sore thumb, just cheaper than it should be priced.  Here is a chart of 30 day implied vol (red line) vs. 90 day implied vol (green line) over the last 2 years, to illustrate:


Chart Courtesy of LiveVolPro


30 day and 90 day implied volatility naturally rallies into earnings events (denoted by the blue ‘E’ box in the chart).  But what’s surprising about the current move in implied volatility is how much more 30 day implied vol has rallied relative to 90 day implied volatility.  That spread is the largest it has been in the past 2 years.

This might make sense if implied volatility as a whole was abnormally high, since you are taking more risk buying a 90 day option (in premium and volatility terms) than a 30 day option.  However, 90 day implied volatility in the chart above (green line) is still at the lower end of its 2 year range.  Granted, realized volatility is also near the low end of its 2 year range, shown here (30 day realized volatility):  



It is still near 20 before earnings, so Jan13 implied volatility at 26 seems high, but not abnormally so.

Against this backdrop, I want to sell Nov and buy Jan13 options.  Like I said though, I don’t know much about this name.  When I asked Dan about the fundamentals, here was his response:

  • QCOM is fairly levered to iPhone, especially 3G versions
  • So the company could have seen some weakness in the quarter as consumers waited for the 4G iPhone 5
  • But this could have been offset by iPad shipments
  • On a pure valuation basis, the stock looks cheap to peers, particularly TXN, which is bizarre given better growth prospects at QCOM.  Dividend yield probably helps TXN

In sum, I don’t see a very clear fundamental backdrop for this earnings move.  Seems like some positives, some negatives, net/net no conviction.  But technicals and the broader market backdrop offer a bit more direction.

On a technical basis, the 61-62 level seems like potential resistance:



Perhaps more importantly, QCOM’s close ties to AAPL could be concerning overall.  Any positive news is likely to be viewed with a fair bit of skepticism as long as AAPL supply and strategic concerns are not resolved.

All of those thoughts gelled to produce this trade:


TRADE: QCOM ($60.30) Bought the Nov / Jan13 57.5 put calendar for $1.04

-Sold 1 Nov (regular expiry) 57.5 put at 0.75

-Bought 1 Jan13 57.5 put for 1.79

TRADE RATIONALE: I don’t have a strong directional bias in QCOM, so this is a 8 delta structure, meaning it will only change 8 cents for each 1 dollar move in the stock’s direction.  Rather, I want to play for the vol crush in Nov after earnings on Wednesday.  I ended up choosing a put calendar instead of a call calendar because of the technical and macro backdrop, but my main objective here is to play the distorted vol differential.