Options Update: Qualcomm Put Volume Spikes on CEO’s Cell-Phone Cycle Warning
Ahead of the open this morning, Qualcom
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PowerRating) CEO Paul Jacobs announced that the company is seeing signs that customers are not upgrading their cell phones as quickly as before. “We’re seeing some evidence there’s a lengthening of replacement cycles,” Jacobs said, noting that customers appear to be holding onto their phones for longer in developed markets such as Japan and South Korea.
The news follows on the heels of an unfavorable patent ruling by a judge last week involving QCOM’s suit with Broadcom
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PowerRating). According to Judge James Selna, Qualcomm violated an existing ban against the use and service of patents encompassing third-generation wireless technology. QCOM was also cited because it hasn’t paid royalties on a patent covering technology used in its QChat walkie-talkie feature.
In the options pits today, put volume is trumping call volume as investors react to news of the slowing cell-phone cycle. More than 37,700 puts have changed hands, nearly quintupling the stock’s average daily put volume. Meanwhile, roughly 23,000 calls have traded, more than tripling the daily average call volume. This activity has placed QCOM on our Intraday Volume Explosion List, but what caught my eye was the wealth of put volume crossing the tape at the stock’s October 50 strike.
Put Buying on QCOM?
Digging into the QCOM put volume, more than 14,600 puts calls have changed hands at the stock’s October 50 strike this morning. Open interest at this in-the-money option currently totals 7,574 contracts, indicating that the majority of today’s activity is likely the initiation of new open positions. Nearly all of the volume has changed hands in blocks ranging in size from 200 to nearly 500 contracts. At 10:23 a.m. Eastern time, 3 blocks totaling 1,000 contracts traded at the ask price of $2.61, reinforcing the idea that these puts were purchased (or bought to open).
For the sake of argument, let’s assume that the blocks of 1,000 QCOM October 50 puts were bought to open. Such a trade could be made on the belief that QCOM will extend its decline below the 50 level by the time these options expire on October 17. Running with this put-buying theme, let’s examine how the trade actually plays out. The hypothetical trader bought 1,000 QCOM October 50 puts for $2.61, or a total outlay $261,000 — ($2.61 * 100)*1,000 = $261,000. For this trade to reach breakeven, QCOM would need to fall roughly 4.5% to $47.39 per share. We arrive at this by subtracting the cost of the option ($2.61) from the strike of the purchased 50 put ($2.61 – $50 = $47.39).
Given that QCOM has already plunged more than 3% today, an additional decline of 4.5% before October expiration seems like a pretty safe bet. Let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for additional profit from this position…
Getting Technical
From a technical perspective, QCOM appears to be rolling over from its recent rally. The shares topped out at $56.88 per share on August 15 – just shy of potential short-term resistance at the 57 level. Meanwhile, the equity is now trading back below former long-term resistance at the round-number 50 level. This area troubled QCOM in mid-June, and could now provide a significant hurdle for the shares going forward.
There is a caveat to this bearish outlook, as QCOM’s 20-week moving average is positioned just below the shares in the 49 region. This trendline has helped stem the security’s losses in today’s trading. Furthermore, the stock has momentum on its side, having rallied more than 30% since the beginning of the year.
The Sentiment Drivers
Turing to the sentiment backdrop, the outlook for a QCOM short position muddies even further. Pessimism reigns among options traders, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.71 ranks above 73% of all those taken during the past year. Any unwinding of these bearish best could provide buying pressure for QCOM, and work against a purchased put position.
On the other hand, Zacks.com reports that 14 of the 17 analysts following the shares rate them a “buy” or better. The lack of “sell” ratings is certainly a positive for a short position on QCOM. Furthermore, analysts could begin to downgrade the stock following news of slowing cell-phone recycling by consumers. Such a development could place pressure on the equity, moving a purchased put position deeper into the money.
The Verdict?
After scanning the sentiment and technical indicators, a QCOM October 50 put still looks like a potentially profitable position. The shares still have support in the 49 region due to their 20-week moving average – which QCOM has not closed a week below since March. However, the likelihood of options players abandoning their bearish positions seems less likely given today’s news and the stock’s resulting plunge. As today’s activity suggests, we could actually see more pessimism flow into QCOM, possibly creating more selling pressure on the shares. Additionally, the potential impact of the slowing cell-phone cycle on the company’s earnings could spur a round of analyst downgrades. For a complete rout of the shares, watch for a breach of support at the 20-week moving average, as this could solidify the profitability of today’s hypothetical purchased put position.
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