I know it's been a while since I've written anything, but I have been extremely busy with my business. However, I wanted to write a quick post about Qualcomm (QCOM), as I am very confident about an option strategy which I will detail later in this post.
First I will note that in my early days as an investor I got BURNED buying shares of Qualcomm and vowed never to purchase or play the stock ever again. It was close to the turn of the new millennium and Qualcomm was really heating up, hitting new highs daily, so I had to jump on the bandwagon. But as we all know nothing lasts forever and "down she came" in the first 6 months of 2000. I didn't jump ship though, hoping it would come back, after all many of my other stocks were picking up the slack. But again, nothing lasts forever and the entire market underwent the tech bubble burst. Between Qualcomm and a few other high flying tech stocks such as Corning (GLW) my portfolio dropped over 90% from the peak in 2000 to year end 2001. A painful lesson, but one of the most valuable lessons I've ever learned. Enough about the past though, time to look at the present.
As stated, I vowed never to play Qualcomm again, but a lot changes in ten years and a company can go from highly speculative to highly valuable, and in my opinion Qualcomm is highly valuable, and has become even more valuable after selling off over 10% since earnings. I would like to accumulate shares of QCOM on weakness not only because they are presently a smart, safe and sound company, but looking to the future projected earnings put a forward PE of around 15 on this company, not to mention if and when a device similar to the iPhone from Apple (AAPL
) comes to Verizon (VZ
), Qualcomm will benefit greatly.
Click chart to enlarge
However I do not want to catch a falling knife because I feel more downside is likely, especially if the market heads lower. It is also worth noting that QCOM formed a bearish engulfing candle pattern on Friday, a potential signal of short-term weakness in the stock, which makes the following option strategy all the more attractive.
Qualcomm Option Strategies: First I'll state that this option strategy may strike you as bearish, and it is, but just for a short time (which is the reason I stated it will benefit from the bearish candle pattern short-term). Overall it is bullish as I am willing to take shares of the stock if it reaches a certain price. I am currently looking to open positions on both the May and June options expiration (half of my desired shares for each expiration). It looks like Qualcomm is trying to form a base around 38 per share, so I will use that as my first level of support. Additional levels of support come in around 37 and 35.50.
May Expiration Strategy: I will structure a ratio put spread using these levels of support. First I'll look to purchase May 38 strike put option contracts, and against each of these contracts I am long, I will sell two May 37 strike put option contracts. This can all be done for a theoretical net credit of $8. This means I receive $8 cash for every one of these positions I am long. For example, If I am willing to get long 500 shares of Qualcomm, I will purchase 5 of the May 38 put contracts, and sell 10 of the May 37 put contracts.
May P&L Info: If Qualcomm closes at or above 38 per share on May options expiration (May 21, 2010) and assuming this strategy is left open, this strategy will return the net credit of $8 per position (less any commissions). If Qualcomm closes at or below 37 per share at expiration and assuming the strategy is left open, this strategy will be profitable down to the break even point of 35.92 per share, but will result in purchasing 100 shares of Qualcomm at 37 for each ratio spread position. The profit max for this strategy at expiration is shares of Qualcomm at exactly 37 per share, which would result in a profit of $108 per ratio position.
June Expiration Strategy: I will employ the same option strategy but slightly different strike prices. I will look to purchase June 37 put contracts and sell two June 36 put contracts against each contract I am long. I decided to structure the June option strategy for a slight lower entry level in case Qualcomm sells off beyond our lowest level of support listed, not to mention I don't like entering shares of any stock all at once (or for the same price). This strategy can be done for a theoretical net credit of $39 per spread. June P&L Info: If Qualcomm closes at or above 37 per share on June options expiration (June 18, 2010) and assuming this strategy is left open, this strategy will return the net credit of $39 per position (less any commissions). If Qualcomm closes at or below 36 per share at expiration and assuming the strategy is left open, this strategy will be profitable down to the break even point of 34.61 per share, but will result in purchasing 100 shares of Qualcomm at 36 for each ratio spread position. The profit max for this strategy at expiration is shares of Qualcomm at 36 per share, which would result in a profit of $139 per ratio position.
The ideas outlined above are bullish strategies and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain.
To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.
Disclosure: Disclosure: Long AAPL May 220 Put Options, GLW May 19 Put Options, QCOM, Short AAPL May 230 Put Options, GLW May 20 Put Options