This week we are going to make a play on Qualcomm (QCOM), which is due to report earnings on Wednesday. And while there is risk in executing a trade ahead of earnings, we are going to play it conservatively by selling an in-the-money call.
Cabot Profit Booster Issue: July 26, 2022
Market Overview
Ahead of the most anticipated week for the market of the summer, led by the Federal Reserve announcement this Wednesday and a third of the companies in the S&P 500 reporting earnings throughout the week, last week the S&P 500 gained 2.56%, the Dow rose 1.95%, and the Nasdaq rallied 3.33%.
This week we are going to make a play on Qualcomm (QCOM), which is due to report earnings on Wednesday. And while there is risk in executing a trade ahead of earnings, we are going to play it conservatively by selling an in-the-money call.
The Stock – Qualcomm (QCOM)
Why the Strength
The smartphone market has been weakening this year, with global handset shipments expected to decline 4% for 2022. Despite the softer market, telecom and semiconductor equipment giant Qualcomm managed to generate over $6 billion in smartphone processor revenue in fiscal Q2, up 56% from a year ago, leading to an increase in the company’s share of that market while continuing to expand its portfolio of 5G mobile platforms.
Qualcomm Snapdragon processors currently power 75% of Samsung’s Galaxy S22 premium smartphones and 40% of its S21 devices, and the company says it’s the “mobile technology platform of choice for premium and high-tier Android” smartphones made by other leading OEMs. In fact, analysts estimate that Qualcomm captured 44% of all smartphone application processor sales in this year’s first quarter. And with the increasing adoption of 5G smartphones, the firm’s front-end radio frequency (RF) modules are also growing, rising 28% in Q2 and allowing Qualcomm to command a leading share of the front-end RF modules market.
Elsewhere, management sees its Snapdragon digital chassis platform as a “significant driver” of the firm’s increasing design wins in the auto sector, while its Snapdragon W5+ and W5 Gen 1 platforms are now the top choice for top-selling smartwatch makers.
On the financial front, growth will be terrific during the next couple of quarters: The company’s guidance for fiscal Q3 calls for midpoint revenue of around $11 billion—up 35% if realized—and midpoint earnings of $2.85 per share that would massively exceed the $1.92 EPS from a year ago. Growth should slow some after that, but the surging momentum in the 5G devices, automotive and wearables markets should provide plenty of tailwinds. A modest valuation (14x trailing earnings) and 2.0% dividend yield add to the appeal. The next quarterly report is due out on Wednesday after the close.
Technical Analysis
QCOM leaped from support near 120 to all-time highs in last year’s fourth quarter, hitting an apex at 190. But the bear phase was too much to overcome, with shares steadily bumping downhill during the next few months, tagging correction lows back at that 120 support level in June. The evidence has improved since then—QCOM has pushed back to its 200-day line (that’s better than ~80% of stocks out there), with a persistent rally in July. Stop - 132
The Covered Call Trade
Buy Qualcomm (QCOM) Stock at 152, Sell to Open September 140 Strike Calls (exp. 9/16) for $17, or a Net Price of 135 or less
Static Return: $500 per covered call (3.70%)
Breakeven: 135
Covered Call Return (if assigned): $500 per covered call (3.70%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 135 or less. (In this case 152 minus 17 = 135. Or another example is you could pay 151.5 for the stock and sell the call for 16.5, which also equals 135)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| EQT Corp. (EQT) | 42.50 | 46.00 | 31.5 | August 40 -- $2.25 | $6.00 |
| JD.com (JD) | 65.20 | 64.00 | 54.0 | August 65 -- $3.50 | $3.00 |
| Alliance Resource Partners (ARLP) | 17.60 | 21.50 | 15.3 | August 17.5 -- $1.35 | $4.00 |
| Fortinet (FTNT) | 61.00 | 61.00 | 53.0 | August 64 -- $2.75 | $2.00 |
| Dollar Tree (DLTR) | 168.5 | 162.00 | 153 | August 170 -- $6.00 | $3.00 |
The next Cabot Profit Booster issue will be published on August 2, 2022.
Analyst Bio
Jacob Mintz
Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.
Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.
After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.
Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.