More rumors have sprouted about Qualcomm, Inc. (NASDAQ: QCOM) designing a chipset for the Apple Inc. (NASDAQ: AAPL) iPhone that will be carried by Verizon Communications Inc. (NYSE: VZ).

Analysts are divided on whether QCOM can justify its current share price above $40 through its new iPhone 4 processor business, or is it overbought and about to drop.

From a technical perspective, the stock’s chart looks like a minefield of gaps and volatility, however, therein lies the opportunity. A stock like this could make a big move very quickly, but it is uncertain which direction, and that makes a neutral trade attractive.

In this case study we will evaluate a long strangle on QCOM.

Trade

Buy to open the QCOM Jan 40/41 strangle.

Analysis

Overhead resistance if the stock “fills the gap” is at $47-$48, while longer-term support is lurking near $30 per share. As long as a breakout or breakdown occurs before expiration, the trade designed will be profitable.

Target Entry Price

Right now this trade costs $5.50 to execute. That means that if this position were held until expiration, the stock would have to be above $46.50 or below $34.50 to breakeven. That is not an unreasonable target or timeline considering recent volatility. It is more likely that the trade will be exited long before expiration, which means the breakeven levels are narrower. 

Position Sizing

The maximum loss is limited to the net debit ($5.50 or $500 per contract).

To learn more about our QCOM analysis and trade-entry demonstration, watch the video here.

This article is brought to you by LearningMarkets.com.

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