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QUALCOMM, Inc. (QCOM) Expected to Stall Out Near 2014 High

Are QUALCOMM, Inc. traders initiating covered calls?

by 7/1/2014 10:28 AM
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QUALCOMM, Inc. (NASDAQ:QCOM) has been churning in a tight range between $77 and $81 for the majority of the past three months. In fact, since hitting a 14-year peak of $81.66 in late April, the equity has been drifting lower, and was last seen lingering near $79.37. This tepid price action prompted a number of speculators yesterday to gamble on the equity to stay parked beneath the higher end of this range over the next seven weeks.

Specifically, QCOM's August 82.50 call saw the most action on Monday, as 3,274 contracts changed hands. Nearly all of these calls traded at the bid price, and open interest rose the most of any strike overnight, making it safe to assume new short positions were created.

The expectation for selling these calls to open is for QCOM to stay south of $82.50 through the close on Friday, Aug. 15 -- when back-month options expire. In this best-case scenario, the calls will expire worthless, and the traders can pocket the initial credit collected as their maximum potential reward. However, should QCOM surge past the strike, the call writers could be required to deliver the shares at $82.50 apiece -- a discount to where they'd be trading on the Street.

In light of QCOM's recent price action, Monday's volume at this out-of-the-money strike could be at the hands of shareholders implementing a covered-call strategy, as they look to make some profit on a stagnating stock. Regardless of the motive, now is an opportune time to sell premium here, as implied volatility is inflated relative to QUALCOMM, Inc.'s (NASDAQ:QCOM) 40-day historical (realized) volatility (18% vs. 7.9%). In other words, premium is more expensive than usual, from a volatility perspective.


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