About a month ago we put on a bullish calendar spread in QCOM. Since that time QCOM came under some selling pressure that saw it trade below 60, but has rebounded in the last few days. With the stock here our calendar is marked at a slight loss but won’t need much more to the upside to become a winner. So how will we manage this with the short side of the structure (July 65c) due to expire a week from now? First, let’s recap the trade:
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
So what are we looking to do now?
Right now the July 65 calls are offered at 4c and will most likely expire worthless. If they do expire worthless what we’ll look to do is spread the remaining long August 65 calls by either selling the 67.5 calls against them, or perhaps rolling the short strike of the calendar to the new weeklies which will be issued next week. It’s worth noting that QCOM reports earnings the week after next, so those weeklies will likely have more juice than normal, though still dependent on where the stock is next week. A third option is to take off the August calls for a profit if we see the stock up towards our sweet spot by next Friday (65.) Which one of these we choose will be determined by where the stock is heading into and following July expiration next Friday.
Looking at the chart, a reasonable assumption is that if the stock continues its bounce off its recent lows it will likely test its 50 day moving average of 62.79. If that were to happen in the next week or so it would be good timing to consider the 3 options laid out above
[caption id="attachment_28026" align="aligncenter" width="500"]
from LiveVol Pro[/caption]
There’s even more resistance not too far above the 50 day in the form of the 200 day at 63.42, but QCOM hasn’t traded as technically respectful as most other stocks in this market, or traded in step with the overall market that much either. So we’ll keep an eye on it ahead of earnings, and see if the recent low really was the beginning of a real rally in the stock.
[hr]
New Trade $QCOM: Getting Ready To Frolick In The Autumn Mist
1:21 pm EDT – June 13, 2013 By Dan
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.
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[/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
Break-Evens:
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"]
from TradeMonster[/caption]
Volatility:
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"]
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.