Stock Options To The Rescue! Qualcomm (QCOM)

| April 25, 2012 | 0 Comments

Today we’re going to look at Qualcomm and how you can use options to reduce your cost basis and profit from the recent decline in the stock.

Here’s what happened…

Qualcomm (QCOM) shares dropped more than 4% from $66.50 to around $64 per share after its quarterly revenue and earnings beat estimates, but their forecast for next quarter fell short of Wall Street expectations.

Here’s the deal…

The semiconductor maker reported quarterly earnings of $1.01 per share.  Earnings were up 72% from last year and above the $0.95 they were expected to earn.

The strong results were driven by a 29% year-over-year increase in sales of chips used in mobile devices.  It resulted in revenue of $4.94 billion.

However, management disappointed investors with guidance for the current quarter.  They forecast revenue of $4.45 billion to $4.85 billion and 83 cents to 89 cents EPS.  That is below the consensus $4.81 billion and 90 cents a share.

Here’s the kicker…

QCOM had a great quarter.  In fact, it was a little too good…

Demand is so strong they’re having trouble delivering enough chips.  As a result, they’re stepping up their spending to increase the supply of chips used in mobile devices.

Strong demand is great news but the increase in expenses isn’t.  More expenses cut into profitability and decrease earnings growth.

But that’s no reason to sell a great stock like QCOM.  Instead, rescue your trade with the help of options.

Here’s what to do now…

Let’s assume you bought 100 shares of QCOM at $66.50 before earnings.  And you’d like to hold onto the stock long term.  After all, QCOM is a great company with growth potential and they pay a nice dividend.

Selling the QCOM October $67.50 covered call is a great way to rescue this trade.

Right now you can sell the Oct $67.50 call for $2.90.  You immediately collect a $290 option premium.  And it puts this trade back in the black.  Remember, you’re only down $250.

There are two possible ways for this trade to get you back to breakeven or even profit on this trade.

First, if RT is above the $67.50 strike on October 20th (options expiration day).

In this case, the call option holder will exercise their option.  Your 100 shares of QCOM will be called away or sold at $67.50.  A profit of $100 ($6,750 – $6,650) on the stock.  You’ll also collect $25 in dividends. And you get to keep the option premium of $290.

You’re out of the trade with a $415 profit or about a 6% gain.  Not too shabby after being down more than 4%.

The other scenario is QCOM is below the $67.50 strike on October options expiration day.

In this case, your call option expires worthless.  You get to keep your 100 shares of QCOM, the $25 in dividends, and the $290 in option premium.

The result is you’ll now own 100 shares of QCOM at an average cost of $63.35 per share.  And at a current price of $64 per share, you’re back above breakeven.

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Category: Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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