Updates – QCOM, XLV Trade Ideas

by CC February 16, 2017 3:41 pm • Morning Word

We’re going to update a few more trade ideas from the past few weeks with an eye towards trade management. This time, Qualcom (QCOM) bullish trade ideas that have worked well, and a healthcare select XLV that hasn’t. First QCOM. We took a look at the stock after it got hammered on news that Apple (AAPL) had filed a $1 billion against the chipmaker and into their fQ1 earnings. Earnings have come and gone, the stock initially rallied but then failed lower than the AAPL news, but has since turned around is is higher than our original post. In that original post we detailed two trade ideas for those looking to buy the dip, one was bullish with a defined risk call calendar and the other was a stock alternative risk reversal. First the call calendar:

Bullish:

QCOM ($55) Jan 27th / March 57.50 call calendar 75 cents
  • Sell to open 1 Jan 27th 57.50 call at 75 cents
  • Buy to open 1 March 57.50 call for 1.50

With the stock now 56.75, and the Jan 27th calls expired, this is now a March 57.5 call worth .90 vs the original .75 paid. As far as trade management, now is a good time to decide if March is long enough for this bounce to continue. The March 57.50 calls are still out of the money. If the stock fails here or even goes sideways those will start to decay and could be worthless if the stock is below 57.50 on March expiration. For those nervous about that it makes sense to close now and look farther out. For those sticking with the position into March it makes sense to reduce that out of the money premium risk by spreading those calls. The March 60 calls can be sold at .30, reducing overall risk to just .45, with the potential to make up to 2.05 if the stock is at or above 60 on March expiration.

The second QCOM trade idea looked out farther and was for those looking to mimic stock but with some room for error if that move on the AAPL news was just the beginning:

QCOM ($55) April 50 put/ April 57.5/65 call spread Risk Reversal for .20
  • Sell to open 1 April 50 put at 1.55
  • Buy to open 1 April 57.5 call for 2.20
  • Sell to open 1 April 65 call at .45

With the stock now 56.75, this trade idea is worth about 1.10 vs the .20 initially risked. It may make sense to now close the April 50 put for .50 to take away any headline risk over the next few months. That adds to the overall premium spent on the trade, but that can be mitigated by rolling the April 65 call lower to the 62.5s. That roll down net’s .25 and the new position becomes the April 57.5/62.5 call spread for .45 (currently worth 1.35). That can be worth up to 5.00 and the total risk to the downside is .45. Not bad odds.

Now to XLV, this was a bearish trade idea that the healthcare stocks would fail at resistance. They didn’t and the trade idea is a loser. Here was the idea from the original post:

Buy the XLV (71.50) March 24th weekly expiration 71.50 / 67.50 put spread for $1

  • Buy to open 1 March 24th 71.50 put for 1.35
  • Sell to open 1 March 24th 67.50 put at 35 cents

With XLV 73.50 this trade is a bust, worth only .40 vs the 1.00 originally paid. Because it’s now $2 out of the money the prospects aren’t great. But there is some time for the market to reverse. Trade management wise it can simply be closed for the over 50% loss (disciplined!) or perhaps rolled higher to the 72.50/70 put spread which adds .15 more risk on top of the losses but has a higher probability in case healthcare stocks reverse in the coming weeks.