Qualcomm, Inc. (NASDAQ:QCOM) saw a rare reprieve in Wednesday’s session. But traders may want to fade the modest cheer with a well-positioned, out-of-the-money put spread on QCOM stock.
After bearish jeers prompted by Apple Inc.’s (NASDAQ:AAPL) litigation fired at Qualcomm several weeks back, Microsoft Corporation (NASDAQ:MSFT) offered QCOM stock investors some slight relief Wednesday. Shares of Qualcomm rallied 1.73% after it was learned that Qualcomm’s 10 nanometer Centriq 2400 processors will power certain Microsoft Azure cloud workloads as the company accelerates its cloud platform services.
That’s potentially a problem for Intel Corporation (NASDAQ:INTC), and the collaboration also shows Qualcomm’s commitment to an ARM-based server ecosystem. This could prove a boon in the future for QCOM stock, but there are no guarantees it will — and it certainly won’t happen overnight.
Having said that, it’s our opinion there’s still a lot for QCOM stock to prove both off and on the price chart.
QCOM Stock Weekly Chart
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QCOM stock did wind up rallying upward of 5% to fresh year-to-date highs, but then the trend turned aggressively bearish. An initial break of the up-channel support line was followed closely by Apple’s litigation news, which sent shares plunging lower deep into bear territory and where they remain today.
The past few weeks have been spent digesting the large and technically destructive loss. Now and with the unwinding of the oversold condition in place, QCOM appears to be ready for a bearish continuation move lower.
Admittedly, there is some support for higher prices. Stochastics have yet to confirm our view. Further, QCOM did hold the 62% retracement level and is now at its highest price since the January Apple-induced gap. Speaking of which, if Wall Street lore holds true, the gap is a sizable area to fill.
Sometimes you just have to call a spade a spade. And for QCOM stock, this means respecting a bearish flag pattern in a stock much closer to 52-week and multi-year lows and well-positioned to challenge those lowly price levels in the coming months.
QCOM Bearish Spread
Considering our view expressed above, I like purchasing the April $55/$52.50 bear put spread. With shares of QCOM at $57.71 the vertical is priced for 46 cents. The vertical limits the trader’s risk to the debit paid. As a practical matter, though, the softer directional risk should allow for a money stop of 50% if our technical forecast is wrong or premature and QCOM begins to fill the bearish gap.
If Qualcomm shares do begin to drop in price, a move to $52.50 or lower at expiration would produce a return of around 400%, or profit of just over $2 per spread.
A required drop of 9% in QCOM stock to receive the max payout might seem a bit steep. But with the sold $52.50 strike lining up with the January low and the spread situated for a late-cycle earnings release, bearish positioning with this vertical trumps any potential bull in Qualcomm shares at this point in time.
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.
