Trade Ahead: How to Play Qualcomm, Inc. (QCOM) Stock Around Earnings

Wireless tech play Qualcomm, Inc. (QCOM) reports earnings Wednesday night, but in advance of the release, investors would be wise to look for clues as to how Wall Street will react to Qualcomm stock.

Qualcomm Logo QCOM M

Let’s take a look at Qualcomm stock’s recent quarterly announcements, QCOM price chart and what, if anything, QCOM’s options market are estimating in front of the earnings report.

Qualcomm Stock Earnings Picture

In front of Wednesday night’s Q1 earnings release, analysts are forecasting profits of 90 cents per share for Qualcomm, with views ranging from 85 cents to $1.03. The consensus estimate compares to last year’s, same quarter result of $1.34.

Q1 reflects a sizable dip from last year’s result, and overall, Qualcomm is expected to see earnings shrink more than 10% in 2016 before turning the corner in 2017 and growing by 16.7%.

On the sales side, Qualcomm’s revenues are expected to climb to $5.7 billion — up sequentially from Q4’s $5.5 billion result, but down significantly from the year-ago period’s $7.1 billion. Meanwhile, sales are expected to decline from $25.3 billion to $23.2 billion before bouncing back 4.7% in 2017.

Over the past year, Qualcomm stock has managed to beat Street profit estimates consistently. Unfortunately, reaction by investors in the immediate aftermath of those reports has resulted in consistent but wide-ranging losses of -15.25%, -3.75%, -0.87% and -10.29%.

The close-to-close price moves in Qualcomm stock have produced an average drop of 7.54% in QCOM, with a one-standard-deviation reading of 6.47.

Qualcomm Stock Chart

Qualcomm stock chart
Click to Enlarge
Source: Charts by TradingView

For the past two years, QCOM stock has been acting as a bearish leader while the U.S. market was more or less climbing higher. The good news is that while the broader U.S. indices tangle with corrective moves, Qualcomm stock is testing key monthly chart support.

So could QCOM actually lead to the upside this year?

In viewing the provided monthly chart, a 50% retracement from QCOM’s 2002 dot-com low and test of its 62% level from its late 2008 low suggest a bottom in Qualcomm stock could be setting up.

Qualcomm stock also is testing lateral congestion from 2005-11, as well as up-channel support — more indications of a technical low.

QCOM Options Pricing

Qualcomm stock finished Monday’s session near $47.50. With two days remaining until Wednesday night’s report, options traders are pricing in a 68% chance QCOM will remain within a range of $43.75-$51.25 though this Friday.

The math behind the Qualcomm stock calculation uses the weekly Jan 29 $47.50 call and put contracts, which are trading on implied volatility of 75.5%.

With expiration this Friday, the pricing in the QCOM straddle is the purest play on the earnings event and tells us what traders collectively expect from Qualcomm stock in the immediate aftermath of its quarterly announcement.

The expected dollar move up or down works out to about 8% by Friday’s close. While significant, the pricing falls within past event reactions and is only modestly above the mean for Qualcomm stock’s recent history and thus appears mostly ordinary.

Bull Call Spread

For traders agreeable with positioning for a potential bottom in Qualcomm stock, the April $50 / $55 bull call spread for $1.25 or better is attractive.

This Qualcomm stock vertical contains a trader’s dollar risk to $1.25 per spread and allows for a potential max return of about 300% if QCOM trades above $55 at April expiration.

The vertical spread also has the effect of drastically reducing the trader’s time decay and volatility risks and keeps the position focused on price direction in Qualcomm stock.

Lastly, by positioning in April, the trader is able to position through Qualcomm’s earnings event with limited risk, have a potential catalyst for shares and sufficient time to potentially realize the QCOM vertical’s max return.

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.

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