We try to be a bit careful on drawing too many conclusions from unusual options activity as it’s nearly impossible to tell the initiating traders intent for the trade without intimate knowledge of the trader, what it might be against, directional, hedge or purely a view on volatility in the underlying. But every so often an outright directional view is worth noting.
Just a bit ago in Qualcomm (QCOM), when the stock was trading $53.90, there was an opening buy of 10,000 June 3rd weekly 55 strike calls for 27 cents. What’s interesting about this trade is that they are in a weekly options and short dated, with no real identifiable catalyst. A quick check of the company’s investor relations page and I see that there is possibly a catalyst for the stock as the CEO, Steve Mollenkopf, is speaking at JP Morgan’s tech conference on May 24th. Is this a real catalyst? Maybe. If the company were to issue a mid quarter update and able to guide up, the stock that trades at a discount to the market, has 37% of their market cap in cash, 23% net of debt, a massive commitment to capital return with a $10 plus billion share repurchase in place and a nearly 3.9% dividend yield could possibly catch a breakout from its recent consolidation.
It’s important to remember that QCOM has been a massive laggard in the semiconductor space, down 25% from its 52 week highs, and 35% from its all time highs made in 2014, with the stock this week trading above its 200 day moving average for the first time since late 2014:
So there is a couple ways to think about a trade like the one detailed above. The trader spent $270,000 in premium for an option to own 1 million shares on a June 3rd close above $55, up about 2% from current levels. The options market places about a 25% probability that the stock will be above $55. Not a horrible risk reward, but it’s important to consider that maybe this is a trader who is short the stock and looking for a dollar cheap short term stop to the upside, or maybe a long who is looking to lever up an existing position despite what looks like a low probability that the premium spent will pay off. Or maybe it’s a trader looking at the strength in the Semiconductor Index today (SOX up 2.7%) and just punting a bit on an unloved stock that maybe breaks out. The point is simple, the only person who knows what the intent is the one who initiated the trade, so why read to much into the call buying.
What I use this sort of info to do is reassess my own view on the stock, take a look at potential catalyst, technical set up, implied volatility of options in the name etc, and possibly develop my own idea on the stock using my own inputs. Whatever the intent of this trader, whether they are bullish or bearish in their overall view of QCOM, they at least recognize the possibility that the stock could breakout, and are possibly viewing the JP Morgan conference as a potential catlyst near term. That info is a lot more important than seeing a random block of options print and make an uninformed trade decision to blindly follow.