Qualcomm (QCOM) is down 22% in the last six months and is below declining 50 and 200-day moving averages. Since stocks tend to trend and indexes are under some mild pressure, a move lower, or at best sideways, is a reasonable expectation for Qualcomm stock. We can set up a bear call spread option strategy that profits if this assumption proves correct.
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Qualcomm Stock Today: The Bear Call Spread
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry. In this case, we’ll start by selling a 175 call on Qualcomm with an expiration of Jan. 17. We’ll add on a purchase of a 180 call at the same expiration, as protection in case Qualcomm ends up going higher.
The choice of 175 as the strike fits our thesis that Qualcomm will remain below its 200-day moving average line over the next month.
The spread brought in a credit of around 80 cents this morning but with Qualcomm falling further today, it’s already dropped in price. If initiating a position now, you could lower the strikes to 170 for the short call and 175 for the long call to bring in just a tad more of a credit as of this writing.
Either way, there’s plenty of margin for error if Qualcomm were to bounce from here.
Profits And Losses For The Trade
Traders selling the 175-180 spread this morning received $80 in option premium which is also the maximum possible gain. The maximum loss would be $420 and is calculated by taking the width of the strikes (5) and subtracting the premium received and multiplying the result by 100.
That represents a potential return of 19% between now and January 17.
The spread achieves the maximum profit if Qualcomm stock closes below 175 on Jan. 17. In that case, the entire spread expires worthless. That allows the trader to keep the $80 option premium.
The maximum loss occurs if QCOM closes above 180 on Jan. 17.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if Qualcomm trades above 170, or if the spread value rises from 80 cents to $1.60.
Poor Ratings Warrant Bearish Position
According to IBD Stock Checkup, Qualcomm stock ranked No. 12 in its group and has a Composite Rating of 62, an EPS Rating of 96 and a Relative Strength Rating of 25. The poor ratings as well as established downtrend suggest a greater probability that the stock remains below its 200-day average.
As this is a bearish position, traders that think Qualcomm could move higher from here should not enter this trade. The position starts with a delta of -7, meaning it is roughly equivalent to being short seven shares of Qualcomm stock.
As an update, the last bear call spread we looked at on Advanced Micro Devices (AMD) has worked very well and can be closed.
Please remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
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