Considering Our Options – $QCOM Call Calendar

by CC December 22, 2015 9:46 am • Education

Qualcom (QCOM) stock has had a rough year and a half, topping out during the Summer of 2014 at $82 and steadily declining to recent lows around $46:

Screen Shot 2015-12-22 at 7.32.55 AM
2 year QCOM from LiveVol Pro

A couple of weeks ago, when the stock was near those lows, we positioned for a small near term bounce or consolidation with a longer term bullish outlook through a call calendar on the 50 strike. QCOM is a horrible stock right now, but it’s also a cheap stock. Owning upside calls into the New Year gives us a shot at a counter trend rally at the very least if not a large move higher if there’s a sentiment turnaround for the company or rumors of more consolidation in the sector. Here’s how that trade looked at the time and our rationale:

*Trade: QCOM ($46.66) Buy Dec 31st quarterly / Feb 50 call calendar for 1.30

-Sell to open 1 Dec 31st 50 call at 40 cents

-Buy to open 1 Feb 50 call for 1.70

Break-Even on Dec 31st Expiration:

-Max profit at $50, max risk of $1.30 with a sharp move above $50 or below current levels.

Rationale: once the Fed is out of the way, trading should slow down a tad and equity vol should settle a great deal into holiday shortened trading weeks. I want to look to off set some decay of the long Feb calls over the holiday period and then look to further spread the long Feb calls once Dec 31st expire.

We entered the trade when the stock was 46.66 and it’s now about $2 higher. Ideally what you want for a calendar is a move towards strike in a way that your short call actually is worth less than when you sold it with the stock lower, combined with the longer dated long call increasing in value along with the stock. That’s exactly what’s happening here. With the stock at 48.65 here’s how the profit and losses look:

  • Stock: +$2
  • Dec31st 50 call -.15
  • Feb 50 call +.20

So what to do now?

The Dec31st calls won’t help a ton if the stock goes lower, so we’re going to have to treat the trade as fairly bullish here. The deltas right now are about +22 and those will increase fast over these holiday shortened trading weeks. And that’s what we want to happen as long as the stock is roughly in the same place, or ideally higher towards $50 into the year end. We have some room to the downside but not much so we’d likely bail on the trade if the stock retreated to where we first entered. On the upside there’s not much risk of a gap unless news came out. So we’ll be patient on this with more patience if the stock goes higher and less if it goes lower into year end.

Once the Dec31st calls expire we have a number of options to further reduce premium in February.