Cautious optimism in major chip stock

Someone is cautiously optimistic in a semiconductor company with a mixed track record.

Qualcomm (NASDAQ: QCOM) suffered a violent selloff on January 23 following news of a lawsuit by key customer Apple (NASDAQ: AAPL).1 Weak revenue guidance followed two days later, sending QCOM to its lowest price since early July.2 But it held those levels and has been rebounding in the last month.

Yesterday a large options trade looked for the short-term gains to continue. It included the purchase of 11,000 March 56.50 puts for $0.24 and the sale of an equal number of March 60 calls for $0.12, resulting in a net cost of $0.12.

These puts give the owner the right to sell QCOM for $56.50 if it’s below that price level on expiration next week. The short calls create an obligation to deliver shares for $60 if they’re above that price. Combining the two is known as a collar.

Investors use the strategy when they want to manage risk in a stock position. The move suggests they are hoping for a modest rally, but want to protect against a drop. They now have a floor in the stock price but will also be forced to sell into a rally. Should QCOM remain between $56.50 and $60, the options will expire worthless and they’ll keep their shares.

QCOM rose 0.20 percent to $57.97 yesterday. While late January brought negative surprises, this week the company announced a deal to develop next-generation chips for Microsoft’s (NASDAQ: MSFT) Azure cloud-computing platform.3 There’s also been a steady flow of positive news in the broader sector, with the Semiconductor Industry Association reporting the strongest growth in more than six years.4

One noteworthy thing about Thursday’s collar strategy is that it targets $60 as QCOM’s near-term top. That same level was a low in September, which could make some technical analysts expect it to become resistance (a price level chartists view as a tough-to-break through ceiling). 

Earnings are scheduled for mid-April, after the options expire. The transaction accounted for almost half the overall option volume in the name in yesterday’s session.

In essence, one big investor sees upside in QCOM, but remains on guard against potential negative surprises.

1. Apple Sues Qualcomm; Company's Legal Woes Begin to Pile Up. 1/23/17

2. Marketwatch: Qualcomm slides on weak second-quarter outlook. 1.25.17

3. Barron's: Qualcomm Teams with Microsoft to Displace Intel in Servers. 3/8/17

4. Semiconductor Industry Association: January Semiconductor Sales Up 14 Percent Compared to Last Year. 3/6/17