QCOM reported their Q2 results last night after the close that beat street consensus and came in near the high end of their previous guidance. While Q3 guidance came in a tad light to consensus, the company raised the mid point of the full year up a smidge which has helped sentiment in the stock today, despite Citi’s downgrade of the stock on fears of high end smartphone saturation leading to further deceleration in units in the months/quarters to come.
Analysts remained overwhelmingly positive on the stock (despite the Citi downgrade) with 41 Buys, 6 Holds and 2 Sells. We have been predisposed to like QCOM’s positioning in the smartphone supply chain despite decelerating growth in mature markets like North America and Europe, but feel they are uniquely positioned to benefit from lower end 3G growth in emerging markets, specifically if their Snapdragon chip was designed into the rumored “low-end” iPhone in the fall.
In early June I set up an options trade (here) playing for a move up into QCOM’s q2 earnings towards to $65 level. The stock obviously didn’t get there and prior to the results I closed the call position for what I paid. Given the stock’s fairly mediocre response to the results, I want to set up a bullish trade that would benefit from any enthusiasm from potential chatter of a low end iPhone or possibly other design wins for the fall, and essentially setting a floor where I would get stopped out at a very key long term support level ~$60. As you can see from the 2 year chart below, the stock needs to hold just above $60 which is also the uptrend that has been in place since the lows in 2011.[caption id="attachment_28543" align="aligncenter" width="589"] QCOM 2 year chart from Bloomberg[/caption]
After closing my Aug 65 call position on Tuesday, when the stock was $62.42, I am looking now to set up a decent entry point to play for a bounce with out taking too much delta risk or Vol risk, but using $60 as my stop. The fairly deep in the money call butterfly detailed below achieves both of these objectives. I will look to establish this position tomorrow after I get a sense for the strength of today’s earnings bounce, if in fact the stock follows through for more than one day.
Theoretical Trade: QCOM ($63.50) Buy Sept 60/65/70 Call Butterfly for 2.00
-Buy 1 Sept 60 call for 4.10
-Sell 2 Sept 65 calls at 1.12 each or 2.24 total
-Buy 1 Sept 70 Call for .14
Break-Even on Sept Expiration:
-Profits btwn 62 and 68, make up to 3.00 with max gain of 3.00 at 65
-Losses of up to 2.0o btwn 62 and 60 and btwn 68 and 70
Trade Rationale: We think without any new incremental news in a a sideways to up market, QCOM should hold the $60 support level and gravitate a bit higher to above the midpoint of the year to date range.
Risk Chart:[caption id="attachment_28548" align="aligncenter" width="596"] from ThinkOrSwim[/caption]