All’s fair in love and war .. and apparently business, at least until you get caught and sued, that it. That’s the situation leading wireless communications chipmaker Qualcomm, Inc. (NASDAQ:QCOM) finds itself in right now. The company is being sued by both the Federal Trade Commission (FTC) and Apple Inc. (NASDAQ:AAPL) for alleged unfair licensing practices and monopolistic behavior. QCOM stock has taken a serious hit in the wake of these lawsuits, leaving many to wonder if the worst has already been factored in.
Today, we have a pair of trade ideas for those eyeing the bullish side of QCOM.
The aforementioned lawsuits, combined with additional selling pressure due to a poor showing with first-quarter earnings, has Qualcomm stock trading down more than 18% so far in 2017. But the shares showed some signs of bouncing back on Friday, with QCOM bouncing off support near $52 and reclaiming its 10-day moving average in the process.
Bargain hunting is the most likely culprit, as QCOM stock traded in oversold territory for roughly a week heading into Friday’s session. If the market has decided the worst is now factored into shares, the stock could have plenty of short-term upside.
Take Qualcomm’s sentiment backdrop, for example. Despite the lawsuits and poor earnings showing, the stock has yet to see a single “sell” rating from the brokerage bunch. According to Thomson/First Call, there are 14 “holds” and 16 “buy” ratings levied at QCOM stock, and the 12-month consensus price target is holding at $65.53 — a full 21% north of the shares’ current perch.
What’s more, short sellers are abandoning QCOM in droves. During the most recent reporting period, the number of shares sold short plunged 9% to 12.4 million, representing less than 1% of the stock’s total float. With short sellers jumping ship, it’s a good bet that worst is already priced in — and Qualcomm could be headed higher once more.
Click to Enlarge QCOM options traders, meanwhile, have taken up a bearish stance. Currently, the March put/call open interest ratio rests at 1.08, with puts and calls in near-parity. That said, the biggest spike in OI in the March series has been at the $50 strike, and appears to be almost entirely made up of sell-to-open activity, indicating bullish-to-neutral put sell action.
Checking in with March implieds, options are pricing in a potential move of about 6% for QCOM in the coming month. This places the upper bound at $57.20, while the lower bound rests near $50.80.
In short, the March $50 strike appears to be an excellent place for put selling activity, while a rally to $57.20 would leave the shares well short of overhead resistance near $60.
2 Trades for QCOM Stock
Call Spread: For those looking to bet on a short-term comeback for QCOM stock, a March $55/$57.50 bull call spread has some impressive profit potential. At last check, this spread was offered at 57 cents, or $57 per pair of contracts.
Breakeven lies at $55.57, while a maximum profit of $1.93, or $193 per pair of contracts, is possible if QCOM stock trades at or above $57.50 when March options expire next month.
Put Sell: If you’re more inclined to follow the bullish-to-neutral crowd when it comes to QCOM, then the March $50 put sell should finish out of the money. At last check, this put was bid at 38 cents, or $38 per contract.
Remember that you keep the initial premium received as long as QCOM stock closes above $50 when March options expire. However, if QCOM trades below $50 ahead of expiration, you could be assigned 100 shares for every put sold at a cost of $50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
