Options Update: Qualcomm Draws Bullish Credit Spread Attention
Later this month, key players in the telecommunications sector will converge at the Mobile World Congress to unveil new products, services, and partnerships.
Qualcomm
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PowerRating) As usual, wherever there is speculation, there are options traders.
In today’s trading, QCOM has been targeted by some heavy put activity. In fact, these normally bearishly oriented options have more than tripled their daily average, placing the security on our Intraday Volume Explosion List. Approximately 40,000 puts have changed hands on the security, but it was the sizable block trades on the March 30 and March 32.50 puts that caught my attention this afternoon.
The Anatomy of a Qualcomm Bull Put Credit Spread
Digging into the activity, I discovered that 2 large blocks totaling 14,500 contracts traded on both the March 30 put (AAO OF) and the March 32.50 put (AAO OZ) at about 11:07 a.m. Eastern time. The AAO OZ contracts changed hands at the bid price of $0.97, while the AAO OF contracts traded at the ask price of $0.50. With the blocks trading at the same time on the same exchange, I can reasonably assume that these trades are related. In fact, it would appear that we are looking at a neutral-to-bullish credit spread on QCOM.
A bullish credit spread involves selling a higher-strike put and purchasing a lower-strike put. This results in a net credit to the investor’s account. The maximum profit is achieved as long as the sold put stays out of the money by expiration. In today’s example, the trader needs QCOM to stay above the 32.50 level by the close of trading on March 20, when these options expire.
So, how does today’s example work on paper? First, the trader purchases the AAO OF puts for a debit of $725,000 — ($0.50 * 100)*14,500 = $725,500. Next, the trader sells the AAO OZ puts for a credit of $1,406,500 — ($0.97 * 100)*14,500 = $1,406,500. A total credit of $681,500 for the position is arrived at by adding the credit received from selling the March 32.50 and the debit incurred for purchasing the March 30 puts — $1,406,500 – $725,000 = $681,500.
Hedging Your Bets
So, why not just sell the March 32.50 puts outright and collect the entire premium? Well, the purchased March 30 puts act as a form of insurance against an unexpected plunge in the position. Once QCOM breaches the 32.50 level, the sold 32.50 put becomes a liability, and continues to lose money until the shares breach the purchased 30 put.
By entering this trade, the investor is indicating that he expects QCOM to hold above the 32.50 level for the next several weeks. The shares have shown little life in today’s broad-market rally, but are holding their ground above key technical support levels. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
From a technical perspective, QCOM has lost a mere 14% during the past 52 weeks, and has outpaced the S&P 500 Index (SPX) on a relative strength basis by nearly 10% during the past 40 trading days. The equity has rebounded nicely from its November lows near $28 per share, but QCOM has been range bound for the better part of the past 3 months. Specifically, the stock has found solid support in the 33 region, but has been unable to best overhead resistance at the 37 level. While a continuation of this sideways trend could be a problem for bullish investors, a credit-spread trader would be delighted to see QCOM continue on its current course. Note that the lower rail of this channel rests firmly above the sold March 32.50 put.
The Sentiment Drivers
Investor opinion toward QCOM is weighted to the bearish end of the spectrum – a development that could provide support for the shares. Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.80 ranks above 91% of all those taken during the past year – hinting at pessimism from the options crowd. Meanwhile, short interest jumped by more than 12% during the most recent reporting period. Despite this added selling pressure, QCOM held its ground above the 33 level – the lower rail of its trading range.
There is one caveat to this positive outlook for today’s trading example: analyst rankings. According to Zacks, 13 of the 17 analysts following QCOM rate the shares a “buy” or better. This configuration leaves the door open for potential downgrades that could push the shares below support at the 33 level, thus forcing a March 32.50-30 put credit-spread trader into closing his position prematurely.
The Verdict?
While the broader market has been quite volatile during the past several months, QCOM has remained quite steady. Sure, the shares don’t appear to be in a stellar rally that would thrill bullish investors, but conditions appear rather amiable for credit-spread traders. In fact, QCOM has been so steady that I would even consider trading just the March 32.50 put, sans the purchased March 30 put as a hedge.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.