The actual jury is still out, but investors ruled bearishly in favor of Nasdaq 100 (QQQ) constituent Qualcomm (QCOM). Yet overreactions have been known to occur on Wall Street, and QCOM may represent just that sort of contrarian opportunity with a well-positioned options spread.
The pain that has been the past year-and-a-half or so in Qualcomm stock saw a new low, quite literally, in Wednesday’s session. A report of an antitrust probe by South Korean authorities directed at Qualcomm’s alleged, unfair licensing practices sent shares of QCOM reeling lower by 9.2% to finish at a four-year low of $48.10.
To be quite clear, nobody knows the outcome yet, but a lot of smart investors are on both sides of what this case might mean to Qualcomm. In Wednesday’s session, bears and fleeing QCOM stockholders obviously won, but the market is only right, until it’s not.
So brew a cup of joe, do some reading of what bears and bulls sides are saying about Qualcomm’s prospects, then decide for yourself if Qualcomm’s situation is really as bad as it sounds … or if the 4% yield, below-market multiple, drones, Internet of Things, Snapdragon or other megatrends the company is investing in make owning QCOM stock worthwhile.
Myself? I’ve decided, QCOM is “kinda, sorta” at this time.
QCOM Stock Monthly Chart
As discussed back in October, QCOM shares saw gains in excess of 600% from its morbid, post dot-com bust to its highs near $82 in 2014 when bulls could confidently bask in the glow of terrific prospects going forward. “Doink” on both counts.
Now, and while wildly out of favor, Wednesday’s South Korean shot fired by authorities does allow traders who remain bullish on QCOM to pick up the name at very attractive levels.
Technical support can be found from a 62% retracement test from QCOM’s late 2008 low to high in 2014, as well as 50% Fibonacci level dating back to Qualcomm stock’s 2002 bottom.
Further, shares of QCOM have already completed a two-step AB = CD pattern at “D.” That’s viewed as a sign investors may be getting ahead of themselves and taking Wednesday’s bearish storyline to an extreme.
Lastly, bullish contrarians have a long-standing channel line that’s being challenged and should act as uptrend support for QCOM shares.
One caveat in using clean chart lines or Fib levels too close to the proverbial vest (and as 2014’s overly bullish price action suggests): There’s always the possibility of an overshoot before bulls might eventually claim QCOM as one of their own again, while pointing at a bottom in hindsight.
QCOM Stock Bull Put Strategy
In appreciating some technical wiggle room around the discussed support levels, I view an out-of-the-money bull put spread as one solid way to position in shares of QCOM.
A bullish vertical of this type is appropriate for investors willing to buy QCOM stock at a below market discount price. What’s especially attractive with this spread is that the trader maintains a guaranteed stop-loss via the lower long put if they were to change their outlook.
In the interim, this puts traders in position to collect a premium in the event QCOM doesn’t sink even further to reach the higher sold strike at expiration — and where the trader might make the decision to accept assignment and go long shares.
After reviewing the QCOM options board, the Dec $45/$40 bull put spread for a credit of 65 cents or better is priced well given what’s been presented. Should Qualcomm stock remain above $45, which is still about 8% away with shares at $49, the trader keeps the entire credit.
Breakeven lies at $44.35 which is in the “wiggle room” area of support as it lays just above the 200-month simple moving average. At the same time, QCOM is below the “clean” uptrend support line, which may turn out to be a good thing.
Time will tell.
Lastly, if QCOM fell below $40 before December expiration, the trader would have a max loss of $4.35 on their hands. That might sound horrible, but if at the same time Qualcomm stock were to find itself trading at $25 or $30 (however unlikely that might be) rest assured the strategy has worked, 100% as intended.
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.