Between its legal battles with Apple Inc. (NASDAQ:AAPL) and continued concern of overvaluation in the semiconductor sector, Qualcomm, Inc. (NASDAQ:QCOM) is not in a good place right now. In fact, QCOM stock’s outlook is downright bearish.
While this is bad news for QCOM stockholders, there is an opportunity for profit if you’re willing to take on a bit of risk.
Before we get to today’s trade recommendation, let’s look at the technical and sentiment drivers for this bearish outlook.
Click to Enlarge Technically, there have been very few high points for QCOM stock this year. Since January, Qualcomm is down more than 20% and is severely lagging its peers in the PHLX Semiconductor Index — which is up roughly 20% year-to-date.
Furthermore, Qualcomm shares have trended lower since late May, riding resistance at their 10-day and 20-day moving averages and breaching former support at their 50-day trendline in early July.
Qualcomm is now testing support near $52. Should this area fail to hold, $50 could quickly fall next, sending QCOM stock back to support near $47.50 relatively quickly.
As for sentiment, the bulls have yet to give up on QCOM stock. For instance, Thomson/First Call reports that only two of the 30 analysts following QCOM rate it a “sell,” despite this year’s abysmal performance. What’s more, the 12-month consensus price target rests at $59.89, representing a nearly 15% premium to yesterday’s close.
Qualcomm stock options traders are also firmly on the bullish bandwagon. Currently, the October put/call open interest ratio rests at 0.65, with calls nearly doubling puts among back-month options. Furthermore, these QCOM bulls have singled out the $55 strike, which sports peak OI for the series of roughly 21,000 contracts, compared to peak put OI of just 16,000 contracts at the Oct $50 strike.
Checking in with October implieds, options are pricing in a potential move of about 6.8% for QCOM ahead of expiration. This places the upper bound at $56, while the lower bound rests near $49. That said, should $50 fail to hold as support, as implieds are hinting at, the losses for QCOM stock could be much higher as bulls finally begin to capitulate to the downside.
2 Trades for QCOM Stock
Put Spread: With the path of least resistance lying to the downside, traders looking to profit from a continued decline in QCOM stock might want to consider an Oct $45/$50 bear put spread.
At last check, this spread was offered at 78 cents, or $78 per pair of contracts. Breakeven lies at $49.22, while a maximum profit of $4.22, or $422 per pair of contracts — a 440% return — is possible if QCOM stock closes at or below $45 when October options expire.
Put Sell: If an outright bearish play makes you nervous, then an out-of-the-money put sell may be more to your risk level. Along those lines, an Oct $45 put sell might be a way to capitalize on technical support. At last check, this put was bid at 23 cents, or $23 per contract.
The upside to this put sell strategy is that you keep the premium as long as QCOM stock closes above $45 when October options expire. The downside is that should QCOM trade below $45 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $45 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
