It was a good run while it lasted for Qualcomm, Inc. (NASDAQ:QCOM) bulls. But the rally is over. It’s time to prepare for a return to normal for Qualcomm stock, and that means lower prices.
In case you missed it, President Donald Trump killed Broadcom’s (NASDAQ:AVGO) unsolicited takeover bid for Qualcomm on national security grounds. Ironically, it was Qualcomm’s work on advanced 5G wireless technology that lead to the deal’s death.
The move comes just as reports surface that Trump is considering $60 billion in tariffs on Chinese imports. Those tariffs include key technology and telecommunications products.
Singapore-based Broadcom had put a price tag of $117 billion on its U.S. counterpart. The bid boosted Qualcomm stock to highs last seen in October 2016. QCOM shares have been volatile since the unsolicited offer was made at the beginning of November last year. The pair continuously fought back and forth over Qualcomm’s valuation, oftentimes publically.
Click to Enlarge Prior to the Broadcom bid, Qualcomm stock was at the beginning of a budding bull rally. The shares were rebounding off support near $50 and had just reclaimed support at their 200-day moving average.
However, QCOM stock is now trading more than 9% higher as a result of the boom and bust of the Broadcom deal. With the main driver for Qualcomm stock’s lofty near-term valuation gone, the shares will be left to drift lower.
With the psychologically important $60 level now north of QCOM stock, the shares will be left to stair step lower. Immediate support could emerge near $59, with greater potential for price support lying near $58 and QCOM’s 200-day moving average.
Barring any positive news to keep the shares afloat and bulls interested, I expect both these levels to fall.
As for sentiment, the backdrop is bullish and largely based on an eventual acquisition by Broadcom. Currently, Thomson/First Call reports that 10 of the 23 analysts following QCOM rate it a “buy” or better, with no “sell” ratings to be found. The 12-month consensus price target rests at lofty $71.44. In short, expect either downgrades or price-target cuts to emerge from the Broadcom fallout.
Qualcomm stock options traders are also firmly on the bullish bandwagon. Currently, the April put/call open interest ratio rests at 0.67, with calls nearly doubling puts among back-month options.
Checking in with April implieds, options are pricing in a potential move of about 7.8% for Qualcomm stock ahead of expiration. This places the upper bound at $64, while the lower bound rests near $55.
2 Trades for Qualcomm Stock
Put Spread: With the path of least resistance lying to the downside, traders looking to profit from a continued decline in Qualcomm stock might want to consider an April $57.50/$55 bear put spread. At last check, this spread was offered at 65 cents, or $65 per pair of contracts. Breakeven lies at $56.85, while a maximum profit of $1.85, or $185 per pair of contracts — a potential return of about 180% — is possible if QCOM stock closes at or below $55 when April options expire.
Put Sell: If an outright bearish play makes you nervous, then an out-of-the-money put sell may be more to your risk level. Along those lines, an April $52.50 put sell might be a way to capitalize on technical support. At last check, this put was bid at 36 cents, or $36 per contract. The upside to this put sell strategy is that you keep the premium as long as Qualcomm stock closes above $52.50 when April options expire. The downside is that should QCOM trade below $52.50 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $52.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.