Qualcomm, Inc. (NASDAQ:QCOM) is looking a whole lot better by some investors’ standards these days. But to this strategist it’s the “same as it ever was,” and a modified fence position in lieu of QCOM stock makes a good deal of sense. Let me explain.
What a difference the past couple weeks have made for Qualcomm and a likely growing legion of believing investors. Immediately in front of the market’s historically cheery “best six months” period, QCOM sank more than 6% and back towards its year-to-date low.
The bearish reaction followed reports Apple Inc. (NASDAQ:AAPL), which Qualcomm is in a costly legal battle with, would “jettison the chip-makers components” in its next generation iPhones and iPads.
Then came earnings. The following session and kicking off the seasonal favor with a bit of “ho-ho-hope” as QCOM stock reversed higher following the company’s earnings and sales beat lured investors back into the name.
And then along came a yuletide-style gift for those bargain-hunting Qualcomm investors. Literally overnight, fellow chip maker Broadcom Ltd (NASDAQ:AVGO) announced a $130 billion offer valued at $70 a share to acquire QCOM stock.
Qualcomm subsequently rejected the offer earlier this week as the company believes the bid “significantly undervalues us.”
The question now might be, do you believe what’s happening off and on the price chart? If so, just how much should investors spend on what could also be another long and drawn out legal affair for QCOM stock?
QCOM Stock Weekly Chart
When I last discussed QCOM’s technical situation, it was jokingly noted the stock was the “same as it ever was” as the share price was virtually unchanged from an earlier analysis. The other, more important reality was what I described as decidedly bullish price action for bullish contrarian investors.
The technical call paid off in spades, as I’ll elaborate on below in the strategy section. What was viewed as a confirmed bottoming base setting up as a broadening pattern made good on that promise, with QCOM stock exploding higher by 26% in just under two months.
Looking forward, the very kind price action in Qualcomm has removed most traditional resistance layers, such as key longer-term moving averages, a filled bearish gap and broken Fibonacci levels of the last couple years. That’s certainly of benefit for investors looking to get long QCOM.
But as the weekly chart also shows, QCOM stock does appear overbought, with an elevated stochastics reading and shares outside the upper Bollinger Band. There’s also a bit of lateral congestion which marks the highs in QCOM over the last couple years which shares are now testing. So, what’s a bull to do?
QCOM Stock Modified Fence Strategy
Our last strategy call in QCOM, simply put, crushed it. A reasonably priced, out-of-the-money Nov $55 call for $1.10 with shares at $52.25 is currently valued at $11. Net of any adjustments that’s an incredible 900% return with expiration just around the corner.
Now and given our stance that QCOM stock has bottomed, but with shares also seen as being overbought near-term, after reviewing Qualcomm’s options board a bullish modified fence is viewed favorably.
One such combination is selling the Dec $62.50/$60 put spread and buying the Dec $67.50/$70 bull call vertical. The combo trades for a debit of 15 cents with shares at $66.02, but a very modest pullback of 0.50% to 0.75% will allow for an even money entry due to its long delta or directional risk.
With a modified fence design, this QCOM investor ditches owning shares for the time being in favor of owning a free long call spread which can capture $2.50 of profit above $70 at expiration. That sounds pretty nice, right?
What if Qualcomm does begin to drop in price? Ultimately, if the out-of-the-money put spread goes in-the-money, the trader is in position to own QCOM shares at a nice discount. Bottom line, a worst-case scenario purchase price of $62.50 lines up with pattern chart support and maintains limited risk of just $2.50 during the life of the modified fence; the downside opportunity also strikes a chord with this strategist.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!
