QUALCOMM (NASDAQ: QCOM) spread trade suggests moderate bearishness


A positive note from FBR Capital on Monday indicating first-quarter chip production checks improved boosted shares of QUALCOMM Inc. (NASDAQ: QCOM ) on the day, but at least one investor who traded a bear call spread appears to think the rally could be short-lived.

QCOM closed up 26 cents to $42.53 so far on the day without any company specific news. The San Diego-based wireless communications producer is due to announce earnings on April 21 after the market closes. Analysts estimate earnings of 56 cents a share. Options action during afternoon trading suggests QCOM shares could be due to hit a ceiling after the projected earnings release date.

Around 3:17 p.m. EST, a block of 10,000 May 43-46 call spreads changed hands for a premium of 95 cents per spread. The investor bought the out-of-the-money ( OTM ) May 46 calls for the ask price of 41 cents per contract and simultaneously sold the OTM May 43 calls for the bid price of $1.36 per contract. In total, the investor collected $950,000 for this bear call spread. The May 46 calls are home to current open interest of 5,000 contracts while the higher-strike calls are home to current open interest of 888 contracts. This volume and open interest discrepancy suggests investors traded these spreads to open.

Before I analyze the risk/reward dynamics of this spread trade, be sure to have your virtual trading account open and build a profit/loss graph.

Investors who sold this call spread could incur a maximum gain of the credit collected, or 95 cents per spread, if QCOM shares close below $43. If the stock climbs higher than $45.05 (the breakeven), the investor begins to lose money, and could incur a maximum loss of $2.05 per spread if the stock soars higher than $46.

Implied volatility of the May 43 calls and the May 46 calls is roughly 25% compared to the stock's 30-day historical volatility of 31%. The lower-strike calls have gained seven cents, while the May 46 calls are currently up two cents on the day.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Options

Referenced Stocks: OTM , QCOM

Jud Pyle

Jud Pyle

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