Qualcomm (QCOM) – Patently Offensive

by riskreversal January 23, 2017 1:13 pm • Trade Ideas

Shares of Qualcomm (QCOM) are down 12% today following Apple’s (AAPL) $1 billion lawsuit against the mobile chip make, alleging QCOM, per WSJ:

leveraged its monopoly position as a manufacturer of baseband chips, a critical component used in cellphones, to seek “onerous, unreasonable and costly” terms for patents, and that Qualcomm blocked Apple’s ability to choose another supplier for chipsets.

This dust up with one their largest smartphone customers could not come at a worse time. The company is attempting to close their $47 billion all cash acquisition of NXP Inc (NXPI) in 2017. That acquisition is part of a massive effort to diversify away from mobile chips and push into emerging technologies like Automotive/IoT etc.

QCOM has had two consecutive annual sales declines, which analysts expected to end in 2017, gaining 2% on a 2% increase in GAAP earnings. While AAPL’s suit is likely to be a tad inflated, there is potential for other customers to claim the same, who knows what sort of judgement and penalties will be applied under the worse case scenarios and what this might do to their credit rating which will then affect their ability to raise debt for their cash offer for NXPI.  You get the point, a lot of uncertainty.

The stock has broken near term technical support at $65, and now the uptrend that has been in place from the multi-year lows made last February below $45.  The next real support level below $55 is $50, which might be a good long entry if the stock were to continue its decline:

QCOM 2yr chart from Bloomberg

Short dated options prices have exploded, nearing levels not seen since the stock was in the lows $40s in the throws of a global market sell off early last year, making long premium directional strategies challenged, especially if the stock were to settle down a bit:

QCOM 1yr chart of 30 day at the money implied volatility from Bloomberg

So what’s the trade?

The next identifiable catalyst for QCOM will be their fQ1 results expected after the close on Wednesday.

For those looking to play for a bounce, a call calendar, selling weekly calls and buying longer dated ones might be the way to play, or possibly risk reversals, selling out of the money call and using the proceeds to buy and out of the money call, both strategies looking to off-set the recent spike in options prices.


QCOM ($55) Jan 27th / March 57.50 call calendar 75 cents
  • Sell to open 1 Jan 27th 57.50 call at 75 cents
  • Buy to open 1 March 57.50 call for 1.50

Break-Even on Jan 27th Expiration: Max gains if the stock is at or near 57.50. Losses if the stock goes lower and losses if the stock gaps significantly higher than 57.50 before Friday’s close.

Rationale: This trade takes advantage of the spike in near term vol to position for a rebound in the stock over the next few months. If the stock is able to stabilize over the next week, the Jan27th calls will quickly decay as vol comes in, as long as the stock is below 57.50. Once they expire the March 57.50 calls can then be spread to create a cheap vertical call spread for a rebound. If the stock continues lower the most that can be lost is .75.


Stock Alternative:

QCOM ($55) April 50 put/ April 57.5/65 call spread Risk Reversal for .20
  • Sell to open 1 April 50 put at 1.55
  • Buy to open 1 April 57.5 call for 2.20
  • Sell to open 1 April 65 call at .45

Break-Even on April Expiration: Losses like stock below $50.20, gains like stock between 57.70 and 65.

Rationale: This is like a buy order in the stock if it goes to 50 or below as the short put would be like long stock below that. It’s also like a buy order for shares if the stock bounces and gets back above 57.70. It risks only .20 in the $7.50 range between 50 and 57.50 on April expiration so any more near term volatility is not as risky as trying to pick a bottom in the stock (and possibly being wrong) would be.