The way Qualcomm, Inc. (NASDAQ:QCOM) looks today, there could be real value off and on the price chart in the months ahead. But if investors are interested in getting long in today’s market; using a modified and bullish fence strategy on QCOM is the stronger value proposition. Let me explain.
According to one analyst on Wall Street, shares of QCOM are nothing short of “the best bargain out there.”
The bullish praise rests largely Qualcomm’s chips having a monopoly within today’s mobile device market, “tremendous upside” tied to 5G technology and shares peeling off 13.5% year-to-date and badly under-performing the broader market.
Throw in a failed nod to Qualcomm stock’s even larger price decline of nearly 35% since hitting an intermediate high of $81.66 in 2014 and lopping off an additional 2.89% in Monday’s broad-based sell-off; and the case for buying shares of QCOM could appear even more solid. I get it, trust me.
In our estimation though and when looking at the other big picture, today’s bargain in QCOM stock may prove to be a value trap for stock bulls based on a well-developed bearish price chart.
QCOM Stock Weekly Chart
It was only a handful of weeks ago when it appeared QCOM was in position to move higher. In late February shares had pulled back into a double bottom pattern while testing a key reversal and broadening pattern formed during 2017 and the 38% retracement level for support.
The price combination held for a short while and QCOM even saw gains of nearly 6% from our cautiously optimistic write-up at InvestorPlace.com. Ultimately though, that pattern failure turned decidedly bearish. Shares have moved sharply lower beneath key supports. In our estimation the next level where buyers are likely to support Qualcomm; would be a retest of the prior lows near $50.
Net, net, the argument for value may exist on some levels. On others though, QCOM stock falls short of looking like a real bargain — unless, investors use Qualcomm’s options for help.
QCOM Modified Bullish Fence Strategy
For investors bullish on QCOM, but respectful of the addressed price risk, a reduced and limited-risk modified fence is a much stronger value proposition in today’s market than buying shares.
A modified fence combination purchases a call vertical and sells a put vertical in the same contract month to finance all or part of the cost of the entire position. The primary objective is for the call spread to go fully in-the-money with Qualcomm stock rallying above the purchased vertical.
As the spread also minimizes risk relative to shares, this type position can work well for investors’ looking to accumulate QCOM if we’re unfortunately correct and shares toil with additional downside in the short-term.
Reviewing the options board in QCOM, one favored modified fence is buying the June $60/$65 bull call spread and selling the June $45/$40 put vertical. With shares at $53.81 the combination’s cost is a negligible 15 cent debit. At expiration and above $65, the trader effectively owns the $5 wide bull call spread for 15 cents. Thus, the realized profit would be $4.85.
Conversely, if Qualcomm stock does weaken further, this position has a safety of margin of nearly $9 from current levels before the bull put spread begins to gain intrinsic value on an expiration basis. That’s nice. And as losses can only build up to $5.15 if QCOM is below $40 at expiration, that compares quite favorably to today’s riskier-looking technical exposure of buying shares at $53.81.
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.
