New Trade Alert for Qualcomm
Buy QCOM October $50 Call @$4.75 or less
Risk Rating: 2 (1 = lowest 5 = highest)
Above Break Even Probability: 46%
Max Loss Probability: 29%
QCOM QUIET ….though QQQ KILLING IT
New ALL TIME Tech highs this week are no surprise as this sector has surged more than 14% in 2017 alone. The one year gain is plus 20% to put performance into perspective.
This trend train is strong with a 40% BOOM off the February 2016 bottom just over a year ago.
On the other end of the spectrum, Qualcomm is barely positive in the last year. Price travels in the last 52 weeks from $72 to $50 place the midpoint resistance pivot higher at $61.
Upside gaps remain to be filled on any short squeeze or bullish buying when sentiment shifts.
The $50 one year support base stands right below with the latest price fall failing to make new lows.
In addition, a fat 4 1/2% QCOM dividend make this a unique tech stock that has a premium payout for long term investors. NOTE the Qualcomm option does not get the quarterly cash BUT the fact that the stock delivers a dividend can be an incentive for some share buyers to buoy the stock.
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development.
An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A Qualcomm long call option can provide the staying power in a potential bullish trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from only modest directional moves.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With QCOM trading at $53.00+, for example, an In The Money $50.00 strike option currently has $3.00 and change in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need – even if the move occurs in the next few weeks. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the QCOM October $50.00 Call at $4.75 or less. A loss of half of the option premium would trigger an exit.
The $50 strike is below the 52 week low…
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
This option also behaves much like the underlying stock with a much less money tied up in the investment. The option Delta is 70%.
The October option has six months plus for bullish development.
The maximum loss is limited to the $475 or less paid per option contract. A stop loss is placed at half of the premium paid to lessen dollar exposure.
The upside, on the other hand, is unlimited.
The QCOM option trade break even is $54.75 at expiration ($50.00 strike plus $4.75 or less option premium). That is around $1.50 above the current price.
If shares just get back to the modest $61 year long midpoint price pivot, the option would be worth $11.00 for a 100% return on investment.