Name That Trade – $QCOM: Debt Loading

by Dan May 13, 2015 3:23 pm • Commentary

Back on March 9th Qualcomm (QCOM) announced a Major Increase in Capital Return Program:

Available Stock Repurchase Authorization Now $15 Billion

Annualized Dividend Increased 14% to $1.92 per Share

Plans to Repurchase $10 Billion in Stock within Approximately Twelve Months in Addition to Commitment to Return a Minimum of 75% of Free Cash Flow to Stockholders

Since the gap opening on March 10th, shares of QCOM have declined nearly 6%:

QCOM since March 2nd from Bloomberg
QCOM since March 2nd from Bloomberg

The stock caught a bid, breaking out of the recent range as the company announced a $10 billion debt offering to help finance the share buybacks, the fifth largest in the U.S. in 2015.  QCOM has $30 billion in cash on their balance sheet, or about 25% of their market cap.  The debt offering makes a lot of sense from a cash management standpoint, especially if they think their stock is cheap with rates where they are.  

The stock has been a bit of a train-wreck since making new all time highs last summer, down about 15%, but up 12% from the 2015 lows made in February.

Options volume is running hot today, 2x average daily, with calls outnumbering puts 4 to 1.  Nine of the top 10 most active strikes are all calls, with the most active 11,000 of the October 70 calls.  The largest block of the day was a buy of 3700 July 70 calls for 2.31 when the stock was 70.32, followed by a buy of  3300 of the Oct 70 calls for 3.20 when the stock was 69.32 immediately after the open.

Looking out to the Summer and Fall I think it is important to consider the potential for QCOM LTE chip to be designed out of the next iPhone, which has been rumored, and was the case with Samsung’s latest Galaxy.  Samsung is likely the culprit of the last couple earnings disappointments at QCOM, as they were a 12% customer, and QCOM investors have reason to worry if AAPL opts for and INTC offering as AAPL is a 10% customer.

If I were inclined to play QCOM from the long side, I would consider defining my risk, as there will be no formal announcement whether or not they are in the next iPhone to be released in September, but it will be evident in their fiscal Q4 guidance to be released in late July and ultimately in the Q4 results due in early November.

Options prices are relatively cheap, and the commencement of the increased buyback (there was $2 billion remaining in March), and possibly a portion of it accelerated should be vol dampening.  One way to define a range during this time period to catch a move back to the prior highs in case potential outcomes are better than expected could be to sell downside puts to buy call spreads.

Here is a trade I might consider in place of long stock:

Potential Trade: QCOM ($69.75) Sell Jan16 60 Put to Buy Jan16 75/85 call spread for even money

-Sell 1 Jan16 60 put at 1.90

-Buy 1 Jan16 75 call for 2.50

-Sell 1 Jan16 85 call at .60

Break-Even on Jan16 Expiration:

Profits:  gains up to 10 between 75 and 85 with max gain of 10 above 85

Losses: below 60, down 14%

Rationale:  I don’t want to enter this trade on an up day in the stock like today, but it makes sense as a long alternative because of the room it allows on the downside if this downtrend is unable to be broken to the upside anytime soon. On the upside gains are similar to that of long stock if the stock could get up towards its recent highs before year end.