Investors could bet on green or red when it comes to the trade war with China. But the trump card may be placing an options-based pairs strategy on Qualcomm (NASDAQ:QCOM) and Wynn Resorts (NASDAQ:WYNN). Let me explain.
What on earth do resorts and casino operator Wynn and tech giant Qualcomm have in common? According to a recent article from CNBC, they’re the top two U.S. companies with the most exposure to China. That could spell certain disaster for WYNN and QCOM shares … or is that a long-shot?
If you’re like me, it’s easy enough to realize the trade war’s impact could be painful for QCOM and WYNN shareholders over the foreseeable future. But if you’re really a like-minded investor, you appreciate there are no guarantees in the theater of politics and this could be more of an opportunity for bulls than bears.
Thus, a pairs trade to diffuse directional risk — in conjunction with a couple of limited and reduced risk options spreads in a combined strategy — is the trump card to play.
So without further ado, let’s look at QCOM, a stock I’m favoring for continued upside, and WYNN, where the wager is for more red in that company’s share price in the days and weeks ahead.
QCOM Stock Long
Despite Qualcomm having the second largest sales risk to China for a US-based company, shares are looking smarter these days off and on the price chart. Last week QCOM stock delivered a solid earnings beat. What’s more, with its roller-coaster pursuit of NXP Semiconductors nixed, the company also announced it will raise its buyback program from $10 billion to $30 billion.
On the price chart, investors liked what they heard. Shares have seen heavy action placed on green in QCOM stock in the two sessions since reporting. Technically, Qualcomm shares have also held a higher low pattern. That’s good news after having put together a double top within an uptrend stemming from the corrective low in 2016.
Looking forward it’s our belief Qualcomm will continue its uptrend and see fresh intermediate highs. But in the event we’re wrong, a limited and reduced risk options strategy is a favored way to approach QCOM stock as a bull.
QCOM Stock Options Strategy
Reviewing the options market for QCOM, I like the September $67.50/$70 call spread. With shares at $62.69, the vertical is priced for 38 cents or roughly 0.50% of the risk associated with buying QCOM stock.
Bottom line, investors will need to see Qualcomm’s squiggly lines on the price chart make new highs at expiration if there’s going to be any intrinsic value for this out-of-the-money vertical.
As that’s aligned with our technical view, this is nice play on a continued move higher. What’s more, this trade leaves buyers in a good position, both financially and mentally, to buy on potential weakness.
WYNN Stock Short
To complete the pairs trade, WYNN stock is our short play within the strategy. Wynn Resorts tops the list of US companies with exposure to China as the country is responsible for a full 69% of its sales.
Truth be told, that’s not much more than QCOM stock’s 65%. However, as the risk versus reward for our bearish options play looks compelling — with an earnings catalyst this week and shares putting together a bearish flag after breaking trendline support — I’m game for betting on red on WYNN stock.
WYNN Stock Options Play
For a bearish strategy on WYNN stock and in lieu of a much riskier short sale of shares, the Aug $157.50/$150/$140 put butterfly combination is attractive for $1.10. With WYNN at $163.69, this trader’s breakeven at expiration is $156.40, or just over 4% below today’s price. That’s good bang for the buck. Well, with a token surcharge of 10 cents.
If the butterfly remains out-of-the-money, it’s also nice to know less than 0.70% is at risk in a stock known for its volatile swings. But if WYNN does drop, this bear could take in as much as $6.40 or 580% if shares land on $150 at expiration.
The somewhat hidden exposure in this combination is asymmetrical. Because the embedded bull call spread is $10 wide compared to the bearish vertical of $7.50, the position will be underwater by $3.60 below $140. However, considering that is 14% lower and risk below the strike is fully-contained, traders may decide a bet that’s landed on red is actually a small price to pay to wager on green after a swift decline.
Disclosure: 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.
