Update $QCOM: Chipped

by Dan April 20, 2016 12:39 pm • Commentary

On Friday we rolled a mildly profitable long premium bearish view on Qualcomm (QCOM) from April 22nd weekly expiration (this Friday) to May expiration (here). Here was the new trade idea from Friday afternoon:

TRADE: QCOM ($51.60) Buy to Open the May 52.5/45 put spread for 2.00
  • Buy to open the May 52.5 put for 2.30
  • Sell to open the May 45 put at .30

Break-even on May expiration:

Losses of up to 2.00 above 50.50 with total loss of 2.00 above 52.50

Profits of up to 5.50 below 50.50 with max gain of 5.50 at or below $45.

Rationale – This roll takes a little bit of risk off the table and extends our time-frame beyond earnings week to May expiration. It tightens up the strikes a bit to help reduce premium risk so the payoff to the downside isn’t as large, but it is more realistic with more time.

The goal was to allow for more time to have this thesis play out, and removing some of the binary uncertainty from tonight’s earnings Q1 event. Well, last night Intel (INTC) reported a fairly mixed bag, beating already lowered expectations, guiding down for the current period, offering what can only be described as cautiously optimistic commentary about their core PC business, buybacks that were above last year’s quarterly run rate and massive cost cuts in the form of lowered capex and job cuts equaling 11% of their workforce (I had more thoughts on INTC earlier here).  INTC is up 1.5% (after being down 3% during the conference call last night).

Since early March we are in the sort of market where investors are looking past near term headwinds for cheap stocks that have demonstrated massive under-performance over the last year. Which leads me back to QCOM.  This trade could set up as a disaster near term, as many of the qualities that make INTC attractive as stock even after a mixed bag of earnings, could also be applied to QCOM.

Also, not that it looked too differently on Friday, but the consolidation between $50 and $54 over the last couple months, the stock’s rising 50 day moving average, and its potential test of its 200 day moving average, poor sentiment and cheap valuation could set up for a breakout in this market environment.

From Bloomberg
From Bloomberg

If I had a different world view of the financial markets, I might think this an attractive entry for a long trade, but I clearly don’t. But I am sick of losing money on the short side, trying to poke holes with rational arguments in an irrational market.

Risk Management:

With the stock at $52.40 the May 52.50 / 45 Put Spread that was purchased Friday for $2 can be sold now at $1.55 for a 45 cent loss.  This might be a prudent action given the relative indifference investors have had in the last week towards Taiwan Semi’s (TSM) weak results and INTC’s last night.

I am now going to cut most of my losses on this trade and dramatically reduce the size of the position and stick with a position size where I am risking what I am willing to lose. The point is that I am very near the long put strike, and fear that a technical breakout above the recent range, above my put strike will erode a good bit of the value of this trade.  I have a short biased trade in the etf that tracks the Semiconductor Index, the SMH, read here, I’ll stick with that.  This is a risk management decision, I would be surprised if the company were to beat in a meaningful way and guide up given what we know about smartphone and tablet demand.

Action: QCOM ($52.40) Sold to Close May 52.50 / 45 Put Spread for 45 cent loss