Prepping for Qualcomm Earnings: Holder, Speculator, Opportunist

• Posted by Greg Harmon
• on July 20th, 2016

Qualcomm ($QCOM) stock went through a long downtrend before embarking on a bottoming consolidation in December. The stock lifted higher in February but then spent 3 months at the long term support/resistance zone before pushing above it in May. Since then it has moved around that range without being able to produce any meaningful separation.

What the stock has done though is remain over its 200 day SMA since May. It tested it twice and reversed higher both times, creating perhaps a mini double bottom. And these two bottoms were higher lows. At least a higher range, if not an uptrend emerging.

Momentum has held bullish for Qualcomm since the February low. The RSI has pulled back to the 40 level a few times but held and reversed. The MACD has crossed down and reset but never dropped to a negative level and without a quick reversal. Both are heading higher into earnings tonight. In total, the chart is neutral to bullish into earnings.

The options activity shows an expected price move of about $2.50 this week, or 4.5%. That is slightly more than the $3.9% average move over the last 6 reports. Open interest shows the Put side strong from 52 to 55 this week. The Call side is sizeable from 55 to 57.5, but the open interest at the 55 Call is more than 2x larger than any other.

Qualcomm, $QCOM

Holder

For a holder of the stock you have several options into earnings. Do nothing and don’t worry about your long term position, sell the stock, or protect it against a short term move. For protection an options collar is the right trade. With the $2.50 expected move a July 22 Expiry 55/52.5 Put Spread can protect your stock against a pullback. Buying the July 22 Expiry 55 Put and selling the 52.5 Put would pay you $2.50 on Friday if the stock falls to 52.50. This spread costs about 80 cents though. So to complete the collar look to sell a covered call. Selling the August 57.5 Call gives a 56 cent credit, lowering your cost for protection to just 24 cents.

Speculator

For the speculator thee are several options as well that off high reward to risk ratios. Here are 4:

Trade Idea 1: Buy the July 22 Expiry 54/55 Call Spread and sell the 52.5 Put for 25 cents.

Trade Idea 2: Buy the July 22 Expiry 55/53.5/52 Put Butterfly for 30 cents.

Trade Idea 3: Sell the July 22 Expiry 52.5/57.5 Strangle for a $0.70 credit.

Trade Idea 4: Sell the July 22 Expiry 55 Straddle for a $2.50 credit.

#1 gives the upside short term with leverage and may put you in the stock at 52.5 Friday. #2 gives the downside looking for the yellow range to be a sticky area. #3 takes a 1.25% credit to risk that the options implied range holds. It is profitable between 51.8 and 58.2 at expiry. #4 looks looks for the large open interest at 55 to hold the stock this week. It is profitable from 52.5 to 57.5.

Opportunist

For the opportunist looking for an entry at a better level options can help as well. One trade I like for these situations is a 1×2 Put Spread. This is buying a higher strike Put and then selling 2 lower strike Puts. For Qualcomm, a July 22 55/53.5 1×2 Put Spread gives downside participation from the 55/53.5 Put Spread until the price hits 53.5. Below 53.5 the extra short Put may be exercised against you, putting you the stock, but with a basis of 52. This 1×2 Put Spread requires margin but gives a small credit, so there is no capital outlay. If the stock moves higher then you just keep the credit.

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