Trade Update Dec 14th, 2012 at 3:02pm:
With the stock falling hard (while AAPL makes new lows) from where I put on this QCOM calendar on earlier this afternoon, I am now going to add a call spread to the previous trade. Here is the trade that I am going to discuss tonight on Options Action at CNBC at 5pm. I am still long the Call Calendar from earlier.
Trade: QCOM ($59.85) Bought Jan13 62.50 / 65 Call Spread for .55
-Bought 1 Jan13 62.50 call for .90
-Sold 1 Jan13 65 Call at .35
Break-Even On Jan13 Expiration:
-Profits btwn 63.05 and 65, make up to 1.95, max gain of 1.95 at 65 or higher.
-Losses of up to .55 btwn 62.50 and 63.05 with max loss of .55 below 62.50
Original Post Dec 14th, 2012 at 2:13pm: New Trade – $QCOM: Catching A Falling Knife, with Defined Risk
QCOM was down about 5% at one point this morning, slicing through its 200 day moving average and through a fairly important support level at $60, but has since bounced. Traders were scratching their heads searching for reasons, but the only reason most could come up with was down in sympathy with AAPL on the perceived weak iPhone5 launch in China. AAPL represents about 6% of QCOM’s sales; while an important customer, not exactly the main driver for a company that analysts expect to grow earnings and sales 16% & 23% respectively in 2013. The company has a stellar balance sheet, with 26% of their $102 billion market cap in cash and no debt, has a 1.67% dividend yield and an existing $4 billion share repurchase program (about $2.6 Bil remaining) announced in the first half of 2012.
Given what appears to be one of the strongest growth profiles in all of large cap tech, at a fairly reasonable price, trading at 14x next years expected earnings, you would expect analysts to be as bullish as they are: 42 Buys, 4 Holds and only 2 Sells with a 12 month price target of $73.75, or about 24% higher than current levels.
While the price action today is a bit panicky, and I am not usually in the business of buying falling knives, I am enticed to do so with defined risk, looking out to early in the new year as QCOM will most certainly be on most growth investors’ holiday shopping list as they set up for 2013.
As I mentioned above, the stock is breaking technical levels, but now sitting on the uptrend that has been in place since the summer lows. It kind of needs to hold here, which is why if I am going to play for a bounce, I want to do with defined risk.
TRADE: QCOM ($60.60 ) Bought Dec 22nd / Jan13 62.50 Call Calendar for .88
-Sold 1 Dec22nd 62.50 Call at .25,
-Bought 1 Jan13 62.5 call for 1.13
Break-Even on Dec22nd Expiration:
-If stock below 62.50 the Dec calls expire worthless and am left with a Jan call.
-If stock above 62.50 the spread is worth the difference
-My Max risk is .88
Trade Rationale: Short dated implied vol popped almost 4 points today on the stocks sell off this morning before settling in up about 3 pts, buying premium outright on a day like today is a tough way to make money on a directional basis in a situation like this i want to sell the short dated pop and set up for upside in the near year. Next Friday, if I am left long the Jan13 62.50 call I will look to sell the Jan13 65 call and create a vertical call spread further reducing my break-even.
This was the other trade I considered, but it got away from me…..did not execute.
TRADE: QCOM ($60.50 ) Bought Jan13 62.50/65/67.50 Call Fly for .35
-Bought 1 Jan13 62.50 Call for
-Sold 2 Jan13 65 Calls for a total of or each
-Bought 1 Jan13 67.50 Call for
Break-Even on Jan13 Expiration:
-Profits btwn 62.85 and 65 of up to 2.15, max gain of 2.15 at 65.00, payout trails off btwn 65 and 67.15
-Losses of up to .35 btwn 62.50 and 62.85 and btwn 67.15 and 67.50, max loss of up .35 below 62.50 and above 67.50
Trade Rationale: Short dated implied vol popped almost 4 points today on the stocks sell off before settling in up 3, buying premium outright on a day like today is a tough way to make money on a directional basis in a situation like this…..the Call Fly offers slight delta exposure at current levels, but will carry better than outright verticals with all the quiet trading days as we head into the holidays. I chose the strikes as 62.50 was where the stock was trading this morning, and 65 should serve as some serious resistance in the near term. I am playing for a new years bounce back towards resistance.