I like days like today. The market is down more than 1.3% and my account is down less than half a percent. I’m running like this because oil is up (although it’s off its highs) and my short options aren’t costing me much. I do have a couple of in-the-money options on T and DIS that are down, but these stocks’ swoon isn’t as bad as the indexes’ losses.
QCOM is also down, but the price drop in my two covered calls cut my losses there. I’m still bullish long-term on QCOM and with that in mind I entered a limit order yesterday to catch the next dip. Not long after 11:00 this morning, that dip triggered my limit order and I sold a naked put at the high trade of the day for this strike. While QCOM was trading at $62.75, I sold one QCOM August $62.50 naked put for $2.40 and received $239.61 after commission. A few minutes after my order hit, I saw the bid/ask move above $2.45, but no other trades went through. I didn’t keep watching it. I think that was close to the high for the bid/ask since QCOM bottomed at $62.68 before rebounding just a few minutes after my trade.
QCOM Naked Put Risk/Reward Breakdown
- Potential profit: $239.61
- Potential return: 3.98%, 19.7% annualized
- Breakeven price: $60.11
- Downside protection: 4.21%
- Recent high: $66.67
- Cushion from recent high: 9.84%
- Expected support: Above $61.25 (the April 30 low), if not the December 14, 2012 low of $59.44
- Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold.
I chose this strike because I don’t think QCOM is going to fall below my cost if assigned, $60.11. I thought about the July expiration, but wanted a little better cushion and would’ve only had an improved my annualized return by 1.2%. Since I already have 200 shares that I’m long with two June $65 covered calls, I didn’t need to push for a massive upside (not that 19.7% annualized is shabby). I’ll get that from my shares if the stock recovers. If the put is assigned, I’ll reduce my cost per share and can continue selling covered calls. QCOM has a 2.22% dividend yield that could help offer support, but not a tremendous amount if Treasury yields keep climbing.
The August $60 strikes could’ve been worth selling, but since I don’t think QCOM is going south of $60, I figured I could accept the risk of a cost per share that’s $1.55 more for the $62.50 contract. The additional 5.5% in potential annualized gains spoke to me more than the fear of losing $155.
The only real hesitation I had with this trade was due to the overall slump starting in the broader market. The S&P 500’s 10-day moving average just crossed below its 20-day moving average. That’s a bearish signal. Since QCOM’s beta is 1.18, one could assume that it’ll fall more than the SPX. I could see that happening in most cases, but it didn’t happen today and I don’t think it’ll happen in the near-term. The PEG for QCOM is only 0.78 with a forward P/E ratio of 12.86. There’s no question that QCOM has risks associated with it, but I think the shift towards mobile devices has legs and QCOM will be in many of those gadgets whether it’s Apple, Samsung or someone else selling them. The upside might not be huge in QCOM this year. That works for me. I’m enjoying collecting the premiums while we await the next bump higher.