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Thursday, November 30, 2023

Qualcomm Strangle Suggests Range-Bound Shares Until October Expiration

Today’s tickers: QCOM, ETFC, CAL, SLB, AUY, EEM, ADSK, NFLX & JNPR

QCOM – Qualcomm, Inc. – Options activity on the digital wireless communications products and services firm indicates shares of the underlying stock could remain range-bound through October expiration. Qualcomm’s shares are down more than 2% to $37.72 with approximately one hour remaining in the trading session. Analysts at Credit Suisse maintain a ‘neutral’ rating on the stock, but slashed its target share price for QCOM to $40.00 from $45.00 and lowered its earnings guidance for 2010 and 2011. According to one options investor, Qualcomm’s shares are likely to trade within a certain range for the next eight months. The trader acted on the range-bound prediction by selling a strangle. The investor sold 10,000 puts at the October $35 strike for a premium of $2.30 each and shed 10,000 calls at the higher October $44 strike for a premium of $1.30 apiece. Gross premium pocketed by the strangler amounts to $3.60 per contract. The trader keeps the full amount of premium only if Qualcomm’s shares trade above $35.00 and below $44.00 through expiration. The premium received acts as a limited buffer against losses should shares swing above or below the strike prices described above. However, losses accumulate for the investor if shares rally above the upper breakeven price of $47.60, or if the stock falls below the lower breakeven point at $31.40 ahead of expiration day in October. Qualcomm’s share price exceeded the upper breakeven point as recently as January 21, 2010, when the stock traded as high as $49.00. Finally, shares have not traded lower than $31.40 – the lower breakeven price on the strangle – since December 5, 2008, when the stock dipped down to $29.33.

ETFC – E*Trade Financial Corp. – Shares of the financial services firm are down 0.65% to $1.54 in late afternoon trading, but options activity on the stock was initiated by bullish investors positioning for a rebound in share price. One optimistic individual established a ratio call spread in the October contract. The trader bought 5,000 call options at the October $2.0 strike for a premium of $0.18 each and sold 10,000 calls at the higher October $3.0 strike for about $0.04 apiece. The investor paid a net premium of $0.10 per contract for the transaction, but stands ready to accrue maximum potential profits of $0.90 per contract if E*Trade’s share price rallies to $3.00 by expiration day in eight months. Shares must increase at least 36.35% from the current price before the ratio-spread trader breaks even at a share price of $2.10. ETFC’s shares last traded above $2.10 on April 28, 2009.

CAL – Continental Airlines, Inc. – A staunchly optimistic CAL-options investor made alterations to a previously established bull-call position today as shares of the underlying stock edged 0.70% lower during the first half of the session to $19.77. It looks like the trader originally purchased 20,000 calls outright at the March $20 strike back on September 1, 2009, for approximately $1.00 to $1.10 per contract when Continental’s shares were trading around $12.50 each. The airline’s shares roared back to life in the past six months, and are up 58% since September 1, 2009 to today’s current price of $19.77. The bullish trader opted to take minor gains by selling the 20,000 out-of-the-money calls in the March contract today for a premium of $1.16 each. But, this is not where the story ends. The trader initiated a new bullish strategy to position for continued gains in the value of Continental’s share price by June expiration. The investor purchased a debit call spread, limiting potential upside profits, rather than sticking with the original plain-vanilla long call strategy. The trader bought 20,000 calls at the June $21 strike for a premium of $2.15 apiece and sold the same number of calls at the higher June $24 strike for an average premium of $1.06 each. The net cost of the transaction amounts to $1.09 per contract. Therefore, the bullish investor stands ready to amass maximum potential profits of $1.91 per contract – for total profits of $3.820 million – should Continental’s shares rally up to $24.00 by expiration day in four months time.

SLB – Schlumberger Limited – A ratio call spread enacted on oil equipment and services provider, Schlumberger Limited, indicates one investor’s optimistic outlook on the stock through May expiration. Shares of the underlying stock are trading slightly lower by 0.25% to stand at $60.73. Schlumberger’s recent $11.34 billion all-stock deal to acquire Smith International was positively received by many analysts. UBS, for example, maintains a ‘buy’ rating on SLB and a target share price of $90.00. It appears the ratio-call spreader observed today also expects share price improvement over the next several months. The investor bought 5,000 calls at the May $65 strike for a volume-weighted average premium of $2.04 apiece, and sold 10,000 calls at the higher May $70 strike for approximately $0.84 each. The net cost of the spread amounts to just $0.36 per contract. Maximum potential profits of $4.64 per contract are available to the investor if Schlumberger’s share price increases 15.25% from the current value of the stock to reach $70.00 ahead of expiration day in May.

AUY – Yamana Gold, Inc. – The Canadian gold mining company’s shares are up 1.20% to $10.24 today, but a number of options players initiated long-term bearish bets on the Yamana in the January 2011 contract. It looks like traders purchased approximately 14,000 put options at the January 2011 $7.5 strike for an average premium of $0.69 per contract. Plain-vanilla put-buyers are perhaps expecting significant share price erosion within the next eleven months to expiration. The puts yield profits to the downside to investors if Yamana’s shares plummet 33.50% from the current price to breach the effective breakeven point at $6.81. An alternative explanation for put buying behavior is that traders are long the stock and merely picking up cheap, long term downside protection to insure the value of underlying positions in case of an all-out share price collapse by next January.

EEM – iShares MSCI Emerging Markets Index ETF – A massive transaction involving 160,000 option contracts took place on the emerging markets exchange-traded fund in the first half of the trading day. Shares of the underlying fund are trading roughly 1% higher on the day to $38.87. The large-volume options play in most likely a bearish risk reversal initiated by an investor looking to cheapen the cost of buying put options. It looks like the trader sold 80,000 calls at the April $40 strike for a premium of $1.12 each in order to partially finance the purchase of 80,000 in-the-money puts at the same strike for $2.47 apiece. The net cost of the reversal play is $1.35 per contract. The parameters of the transaction suggest the trader expects to make money beneath the effective breakeven share price of $38.65 by April expiration. The large size of the trade and the inherently risky nature of naked call selling indicate the investor responsible for the transaction is very likely long shares of the underlying fund. If this is the case, the trader is establishing downside protection should EEM’s shares trade below $38.65 within the next couple of months. If no underlying shares are held by the investor, the short 80,000 calls at the April $40 strike expose him to potentially unlimited losses in the event that shares rally above $40.00 ahead of expiration day.

ADSK – Autodesk, Inc. – Shares of the world’s largest provider of 2D and 3D design and engineering software and services are soaring more than 9.25% higher to a new 52-week high of $28.03 in morning trading. Autodesk’s shares jumped after the firm posted fourth-quarter profits of $0.30 per share, which trumped average analyst profit forecasts of $0.23 per share. The stock was trading as high as $28.24 in the first fifteen minutes of the trading day and received an upgrade to ‘buy’ from ‘hold’ with a 12-month target share price of $31.00 at Needham & Co. early in the session. Bullish options traders coveted approximately 1,300 now in-the-money call options at the March $28 strike for an average premium of $0.70 apiece. Investors long the calls stand ready to amass profits if ADSK’s shares trade above the breakeven point at $28.70 ahead of expiration next month. Options implied volatility collapsed 34.54% to 24.96% following earnings.

NFLX – Netflix, Inc. – Two-way trading traffic in near-term put options occurred in early trading on the provider of DVD-rental-by-mail services this morning. Netflix’s shares increased 0.40% to $64.64 thus far in the session, but it looks like the majority of the put options are being purchased. Upwards of 18,500 puts changed hands at the March $60 strike for a last traded premium of $1.10 each. In the first hour of the trading day, options traders purchased at least 6,600 puts at that strike for about $0.99 each, while roughly 2,600 puts were sold for approximately the same amount of premium. Perhaps investors are initiating bearish positions on Netflix because they anticipate the firm’s share price will fall ahead of March expiration. The surge in demand for put options on the stock lifted options implied volatility roughly 5.4% to 37.92% this morning.

JNPR – Juniper Networks, Inc. – The telecommunications equipment provider’s shares are up 3.10% to $27.73 this morning perhaps after Barclays Capital Equity Research reiterated its ‘overweight’ rating and target share price of $33.00 on the stock. Juniper Networks was also raised to ‘neutral’ from ‘negative’ by analysts at Avian Securities today. Despite the upgrades, bearish options activity dominated early trading patterns on the stock. One investor purchased a debit put spread by picking up 3,000 in-the-money puts at the April $28 strike for a premium of $1.63 apiece, marked against the sale of the same number of puts at the lower April $26 strike for $0.72 each. The net cost of the bearish play amounts to $0.91 per contract. Maximum potential profits of $1.09 are available to the investor if Juniper’s share price declines to $26.00 by April expiration.


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