Source: Karlis Dambrans via Flickr
This is a deal that has been in the works for months and was supposed to be the largest technology deal of all time. But since the reason given was an order of National Security then it’s likely that the Qualcomm/Broadcom deal is dead for good.
Qualcomm stock is falling hard on the news, and therein lies my opportunity. The upside of this news is that QCOM may go back to traiding fundamentals instead of headlines. And that is something I can quantify and bet against.
Fundamentally, Qualcomm is not cheap from the price to earnings ratio perspective. But I have enough visibility on the price action that I can trade against just that. The stock market in general remains in a bullish posture in spite of the short-term sentiment flips.
So soon enough, Qualcomm should go back to trading with the technology sector and that has been on fire. Case in point, the price action in the likes of Micron Technology, Inc. (NASDAQ:MU) and Amazon.com, Inc. (NASDAQ:AMZN) . Even Apple Inc. (NASDAQ:AAPL) set new highs yesterday.
My thesis today is simple. I want to bet against midterm downside support. It is important to note that I don’t need a rally to profit, but should one come, my profits would accelerate. I will use QCOM options where I can sell downside risk against proven support and let time do the rest. If price goes against my thesis then I will own shares, in which case I am confident I can manage those to profitability over time.
Technically, it is clear that even with this morning dip, Qualcomm stock may still have some downside risk before it prices out the November spike on the buyout news. But over the longer term, there are several layers of support that should be independent of any acquisition headlines.
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The experts on Wall Street have been in a holding pattern on the stock so there shouldn’t be a deluge of downgrades from yesterday’s headline. QCOM stock is now trading lower than all analyst expectations. So there might be some price target downgrade announcements and those can temporarily impose downside pressure. Nevertheless I think I am creating a large enough buffer from current price to account for a few more bumps along the way.
Qualcomm Stock Trade Idea
The Trade: Sell the QCOM Sep $45 naked put for $1. This is a bullish trade where I have an 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $44.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the QCOM Sep $50/$45 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 15% if successful.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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