After the volatility storm

02/13/20
  • QRVO hit record high Jan. 30, then pulled back
  • Company well positioned in 5G space
  • Wednesday’s rally pushed stock to short-term resistance

Yesterday Qorvo (QRVO), a chipmaker with a heavy footprint in the wireless communications space, rallied for a third-straight day to challenge its February 6 swing high (around $11.80)—a near-term resistance level that appears to be the only obvious technical barrier in the way of a challenge to the stock’s recent record high:

Chart 1: Qorvo (QRVO), 10/28/19–2/12/20. Qorvo (QRVO) price chart. Approached short-term resistance yesterday.

Source: Power E*TRADE


The January 30 high of $122.37 came early in the day after QRVO released earnings that blew past estimates, thanks in large part to strength associated with 5G wireless1—the latest generation of Wi-Fi connectivity that will, in relatively short order, be industry standard (i.e., before too long, that’s what you’ll be using).

But perhaps because the news came around the time early coronavirus fears were peaking in the markets—Qorvo was noted for its potential vulnerability in the event the outbreak turned out to be more severe than expected2—the stock’s 8.7% intraday rally evaporated by the close, and at its lowest point on Monday of this week, the stock was almost 16% below its January 30 high.

The stock’s current three-day rally unfolded amid an easing of virus fears—and some new bullish notices from analysts, including Wells Fargo initiating coverage of the stock with a $135 price target,3 and J.P. Morgan singling out the company to benefit from this year’s ramp-up to 5G.4

In short, yesterday the stock was trading lower than it was the day before it released earnings, and was on the brink of breaking out above a technical barrier that could potentially draw in traders and investors who had gone to the sidelines as coronavirus headlines dominated the news cycle.

Options traders expecting the stock to mount a near-term challenge to its recent record high—but who may also want to limit their exposure, given recent volatility—may be considering bullish call spreads like the one shown below. It’s a limited-risk, limited-reward play that consists of a long at-the-money call (March $110) and a short out-of-the-money call (March $120) that lowers the cost of the position (in this case $405 per spread), but also caps the position’s upside in the event the stock keeps rallying:

Chart 2: QRVO March $110–$120 call spread. Bull call spread risk-reward profile. Can profit on stock move up to $120.

Source: Power E*TRADE


In this case, the trade’s maximum profit would be $595 per spread regardless of how far above $120 (the higher strike price) the stock rallied. But the trade’s risk is limited to the cost of the spread.

Also, some traders sometimes adjust the number of options in a vertical spread like this based on how bullish they are. For example, a more aggressive trader may buy two of the $110 calls for every short $120 call (a 2:1 “ratio spread”), or go long three $110 calls for every two short $120 calls (a 3:2 ratio spread).

The trade-off is greater potential reward if the up move in the stock plays out, but a higher up-front cost.

But when conditions are volatile, having the option to tweak your risk–reward profile never hurts.

Market Mover Update: Yesterday March crude oil futures (CLH0) enjoyed their biggest up day in nearly six weeks, rallying more than 3% to push back above $51/barrel. E-commerce platform provider Shopify (SHOP) jumped more than $100 to $594 in early trading after crushing earnings estimates. Performance Food Group (PFGC) reversed Tuesday’s downturn with a 2.4% intraday rally to a new record high yesterday.

Today’s numbers (all times ET): Consumer Price Index, CPI (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Alibaba (BABA), American International (AIG), Arista Networks (ANET),  NVIDIA (NVDA), Kraft Heinz (KHC), Mattel (MAT), Yelp (YELP), PepsiCo (PEP), Roku (ROKU).

 

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1 StreetInsider.com. Qorvo Inc (QRVO) PT Raised to $150 at Needham & Company. 1/29/20

2 MarketWatch. Goldman Sachs says impact of coronavirus will be ‘limited,’ and these are the stocks to buy if it’s right. 2/11/20.

3 Seeking Alpha. Qorvo +1.3% as new bull praises demand. 2/10/20.

4 TipRanks. JPMorgan: These 3 Stocks Are Well-Positioned to Benefit from 5G Ramp. 2/10/20.

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