The market hates uncertainty, until it doesn’t. Bearing that in mind, climbing a wall of worry in Qualcomm, Inc. (NASDAQ:QCOM) looks great, especially as part of a limited-risk bullish spread strategy in QCOM stock. Let me explain.
Can QCOM investors be faulted for being a bit on edge of late? There’s the NXP Semiconductors NV (NASDAQ:NXPI) deal to consider. The merger also still needs to receive approval by regulators and shareholders. That could definitely be a source of concern, right?
Another possible question mark is whether Apple, Inc. (NASDAQ:AAPL) will drop Intel Corporation’s (NASDAQ:INTC) slower chips in the iPhone 7 and give Qualcomm’s faster chip future iPhone exclusivity? And if that weren’t enough, what about weaker mobile phone sales in general?
Those are just a couple of the matters weighing, kinda sorta, on Qualcomm investors. The good news is the market doesn’t always hate uncertainty and which, in this case, could be sticking around for a bit.
The thing is, when Wall Street decides it’s feeling jolly in the face of unknowns and potential weights, it can always opt for putting on its spikes to climb the proverbial wall of worry.
Having said that and in conjunction with a solid, but not-too-perfect-looking technical picture, QCOM looks well-positioned for upside.
QCOM Stock Weekly Chart
Since reporting its earnings beat a month ago, shares of Qualcomm have done a nice job of testing lateral support within an existing uptrend channel that has developed this year. The QCOM price movement isn’t perfect by any means, but that’s okay in this strategist’s view.
Technically, some relative weakness over this period and the fact QCOM stock didn’t rally to new highs following its quarterly results are a modest technical blemish. As much, the price action is something to be aware of down the road if conditions do continue to deteriorate.
In the here and now though, and without needing to be to “ho-ho-hopeful,” the weekly Qualcomm price chart suggests the current congestion pattern will resolve itself to the upside.
Supporting this view are near oversold levels on stochastics, as well as QCOM’s 2.5-month flat base consolidation centered on the 200-week simple moving average and 62% retracement level. The orderly time and price contraction looks nothing short of technically constructive for a continuation of Qualcomm’s rally.
Upon an anticipated breakout to the upside, there’s little to no incentive for bears on a technical basis to position in QCOM. At the same time, that type price move would provide reason for bulls to pile in for a rally back to 2014’s highs near $82. First things first though and that’s getting to and through resistance.
QCOM Bullish Combo Spread
In looking at QCOM’s options and given our view expressed above, I like purchasing the Feb $70/$72.50 bull call spread.
The out-of-the-money vertical is priced for 68 cents with shares of Qualcomm changing hands at $66.42. Were a breakout above roughly $70 in QCOM to occur, an additional move of about 3.5% would yield $1.82 in profit at expiration for a return of 267%.
If QCOM stock rallies sooner, rather than later, the trader can anticipate modest profits to build before the spread is actually in-the-money. That’s due to the vertical’s small positive delta or directional risk which currently stands at 11 deltas versus 100 for a stock position in Qualcomm.
Alternatively, if QCOM stock were to fail technically, the lesser directional risk associated with this spread means this trader has the likely opportunity to cut his or her maximum loss to a lesser amount. That’s a nice feature to consider.
Ultimately, options Greeks conspire to keep the maximum profits elusive until the vertical is fully in-the-money at expiration or unless QCOM is able to rally even more strongly prior to maturity.
The upshot to lesser and capped profits is the reduced risk associated with this QCOM vertical.
The cost of this position compared to an outright call, as well as lower volatility and time decay risks are benefits which should be recognized when weighing comparable positions. And in our opinion, the pros trump the cons with this Qualcomm vertical.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
