Qualcomm Pops, One Trader Thinks It's Going Back Down
One of the most actively traded stocks today during the big rally was Qualcomm, which is one of the companies that we own. Qualcomm shot up by $1.30, which was a pop of 3.4 percent. That's better than the Nasdaq's gain today of around three percent.
Still, despite the big gains in Qualcomm today, one options trader has a a very different opinion. The stock's been bouncing between $38 and $40 for the past couple of months, which is great for those of us who sell covered calls. This means if we sell a call with a strike price just outside the trading range, we are likely to collect the premium income and not have our position called away. We're also likely to be in a position where we don't lose out on capital gains beyond our strike price, because the stock's range bound.
This options trader, however, set up a big long put spread on Qualcomm. They bought 347 Qualcomm January 2011 puts with a strike price of $37. And they turned around and sold 347 January 2011 puts with a strike price of $32.
That means that this trader has just put in a big bet that the share price of Qualcomm will fall, but not below $32. That means that they'll make money on the $37 puts they purchased and collect income from the $32 put they sold. They're hoping that the stock will drop to just above the $32 strike price of the puts they sold.
In order for this to happen, Qualcomm's stock will have to drop by 19 percent. Is this likely to happen? In the mind of the trader who set up this long put spread, the answer is yes. However, with the demand for smartphones continuing to increase and Qualcomm's technology being a key part of these, that could be a bad call.
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