Qualcomm, Inc. (NASDAQ:QCOM) stock has had a violent 12 months. Yet overall it’s virtually flat. The weekly longer-term chart shows where price did not belong. So unless they had perfect timing, those who chased short-term upside potential are now holding losses. I use options to eliminate the need for perfect timing. That way, I can use time to deploy strategies that don’t depend 100% on price targets up or down.
History shows that above $70, it was too high. Now QCOM is trying to establish that below $50 per share is too low. So it’s trying to set a range of balance. As a risk seller, this gives me upside and downside levels against which I can sell risk for income.
Click to Enlarge Take away the whipsaw moves that legal headlines involving Apple Inc. (NASDAQ:AAPL) cause, the fundamentals are pretty compelling. They suggest value. The company’s price-to-earnings ratio is 19, which is pretty low for the tech sector. Add to it that it pays a dividend and a price-to-book under three suggest that owning it here is not likely to be a massive mistake, even less so at a hefty discount from today’s price.
Technically, it’s not encouraging to see prices setting lower highs for weeks. But recently we see a string of higher lows knocking at a roof. The bulls were also able to break a string of lower highs that started on May 23. But the potential problem is that QCOM stock is now approaching a pivotal level that is likely to become one of contention. Neither bulls nor bears will be willing to give it up the $57.40 area without a fight. This usually causes a stall.
While a stall would make me wait before buying the stock, thanks to options it’s an invitation to sell risk. There I can be bullish without needing price to rise. As long as I can make an assumption for a support level, I can sell downside risk against it for income. Case in point is the trade I shared in March delivered nice profits even when the price action was less than favorable.
Furthermore, expectations from Qualcomm are humble. Most analysts rate the stock as a hold, so the chances of a deluge of downgrades is low. But like we said earlier, this stock is vulnerable to headlines and those could cause temporary uncertainty for both bulls and bears. But therein lies the potential to generate income with no immediate out-of-pocket expense. The most immediate catalyst comes this week when they report earnings.
QCOM Stock Trade Idea
The Trade: Sell QCOM Jan 2018 $45 puts and collect 90 cents per share to open. This means that I need the price to stay above my strike, else I have to own the shares and suffer losses below $44.10.
Selling naked options is risky and is not suitable for all traders. For example, not every trader wants to own the QCOM shares. So, I can mitigate this risk by selling spreads instead of naked puts. Or conversely for someone who wants to short the stock, instead of selling naked calls it’s much safer to use credit call spreads.
Today I only want to bank on the value below current Qualcomm price so, I will not sell any upside risk for balance. I will take a directional trade which bets that there is a floor to the stock through 2017.
The Alternate Bullish Spread Trade: Sell the $45/$40 QCOM credit put spread. I still need the price to stay above my spread, but my risk here is much smaller. If successful, this would still yield 10% on risk.
Investing has risk, so I never take trades that could break my portfolio.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.