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Qualcomm Shareholders Pick Up Protection Against a Pullback

Investors use both puts and calls to hedge their portfolios

by 10/4/2012 1:43 PM
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Puts have been growing in popularity on QUALCOMM, Inc. (NASDAQ:QCOM - 62.48), per data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, the stock's 10-day put/call volume ratio has risen to 0.64, from its 50-day ratio of 0.47. Plus, this shorter-term volume ratio ranks in the 84th percentile of its annual range, indicating puts have been bought to open over calls at an accelerated clip in recent weeks.

In today's session, though, calls are being preferred over puts. Around 14,000 calls have crossed the tape so far, nearly triple the 4,700 puts that have changed hands. The weekly October 62.50-strike call, which expires on Friday, Oct. 12, has emerged as a favorite among option traders. Nearly all of the 1,250 contracts have traded at the bid price, and there are currently no open positions at this strike, making it safe to assume that new positions are being sold to open here.

By selling these calls to open, speculators can retain the full premium collected, or $0.72, which Trade-Alert indicated was the volume-weighted average price for the positions, as long as the equity finishes at or below $62.50 next Friday.

Given QCOM is up almost 18% off its year-to-date low of $53.09 (tagged on July 17), though, this recent activity among both put and call players may simply be the result of shareholders guarding their portfolio against a potential short-term pullback. By buying to open protective puts, shareholders can hedge against the possibility of a pullback. Meanwhile, by selling to open covered calls, investors are able to collect premium to offset any near-term downside, should QCOM lose some steam.

As touched upon, the stock has exhibited some upward momentum of late, and from a longer-term perspective, QCOM is sitting on a respectable 23.7% year-over-year gain. On the charts, the equity has found a foothold atop its 50-day moving average -- a trendline that has ferried QCOM higher since late July.

With shareholders being shareholders above all else, these investors should be cheering today's positive price action. At last check, QCOM was up 0.7% to trade at $62.48.

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