New Trade $QCOM: Getting Ready To Frolick In The Autumn Mist

by Dan June 13, 2013 1:21 pm • Commentary

QCOM is a stock that we have tried to buy on a few occasions when the stock has gotten oversold.  Over the last month the stock has sold off 8% on virtually no news and is quickly approaching a key technical support level at $60.

QCOM q yr chart from Bloomberg
QCOM q yr chart from Bloomberg

Chatter has been heating up that AAPL will at some point in late Q3 or early Q4 release a low end iPhone and this could likely be a positive catalyst for QCOM as the blogosphere has reported rumors that QCOM’s Snapdragopn chip will power it (here).  

Aside from future design wins, QCOM is becoming a “value tech”‘ name trading at 12.50x next years expected earnings that should grow ~8% with sales growth of ~10%.  The P/E level is trading near 10 year lows.

[caption id="attachment_27008" align="aligncenter" width="589"]QCOM 1o yr P/E chart from Bloomberg QCOM 1o yr P/E chart from Bloomberg[/caption]

QCOM has many of the attributes that have powered recent gains in stocks like INTC, AMAT & MSFT, but recently has been shunned by investors.  The company has a $5 billion share buyback, pays a dividend that yields 2.28%, 28% of their market cap in cash, and no debt and has a better growth profile for its valuation than almost any other semi company.

But here is the problem, the stock acts like garbage, and we don’t know why.  Fiscal Q3 earnings will come in August expiration, confirmed for July 24th after the market close.  This will be the next immediate catalyst.

I want to set up to own Aug upside calls into their fiscal Q3 earnings as I think the stock could bounce after a strong report and guidance that could include Snapdragon for low end iPhone.

Trade: QCOM ($61.47) Bought the July/Aug 65 call spread for .62

-Sold July 65 call at .42

-Bought Aug 65 call for 1.04


The ideal spot for this stock at July expiration is 65, at which point the short July call will be at zero and the August call will still be bid. Before then the structure is slightly bullish with 65 still acting as the ideal spot, but even without much movement the structure will benefit from July decaying at a faster rate and August IV hopefully staying bid due to the fact that it catches earnings. If the stock were to crack recent lows and go lower the structure starts to do badly as the entire premise becomes far out of the money.

Payout Diagram:

[caption id="attachment_27017" align="aligncenter" width="542"]Screen Shot 2013-06-13 at 11.08.55 AM from TradeMonster[/caption]


The July sale is basically a way to finance buying what is fairly cheap earnings month vol in August. August calls are about 22 vol and earnings month tend to end up in the high 20’s going into the events (IV30 in Red):

[caption id="attachment_27019" align="aligncenter" width="592"]Screen Shot 2013-06-13 at 11.11.04 AM from LiveVol Pro[/caption]

Trade Rationale:  Outright long premium trades don’t look particularity appealing, but given the stock’s relative weakness it does make sense to define your risk if you are looking to play for a bounce.  I chose the 65 strike as I feel that to get through that level it will take a fairly important positive catalyst (earnings?).  So this structure buys me some time and if the trade is in the game prior to earnings I will look to spread the Aug calls that I own and further reduce my break-even.