The only options I had left going into today were on QCOM and it was just two of the same contract. My two QCOM June $65 covered calls expired worthless and left me with a full profit on the $381.82 I received two months ago when QCOM was trading at $63.86. I expect QCOM to recover, but after topping out a couple of minutes after the open today at $61.05 I started thinking about re-writing my covered calls at a lower strike.
Since my $65 strike covered calls were at no risk of being assigned today, I let them expire worthless after the close. In the early afternoon, while QCOM was trading at $62.50, I sold two QCOM August $62.50 covered calls for $1.41 each and received $280.46 after commissions. I debated this one longer than I do with most of my trades. I had to decide if I wanted to wait for QCOM to recover or if I should go ahead and sell new covered calls to cut any further losses from the highs. I also struggled with which strike and expiration to sell once I opted to move forward with new covered calls.
QCOM’s valuation weighed on the argument to wait out this dip. QCOM has a trailing P/E of 16.91 and a forward P/E ratio of 12.27. Based on a graph I saw in a Ford Equity Research (FER) report, this makes QCOM look like it is in the low end of its usual trading channel in relation to its earnings. The typical range is between a P/E ratio of 15 and 27. That gives a ton of upside, but the worry is that they might miss earnings estimates with slowing mobile device demand. I think QCOM has room for error without getting spanked, but there are no guarantees. Still, it seems a downward revision is built in already. The FER report shows QCOM as having positive earnings strength, relative valuation and price movement, but only rates the stock as a hold.
Fear weighed on the argument to sell covered calls and take some more profits now. Along with my 200 shares I’m already long, I’m short one August $62.50 naked put too. That put is essentially an August $62.50 covered call as far as the risk/reward goes, so I decided to stick with the same strike and make it a straddle, kind of. (Technically, a straddle wouldn’t have the 200 shares long, but you get the point.) I’ll be better off if QCOM finishes August expiration close to $62.50. I might be able to keep my 200 shares for a future rally and might be able to decide if I want the assignment or not for an extra 100 shares. Having 300 shares at $62.50 is only about 17% of my account. That means I’m not overextending myself with a single stock. I don’t want to load any more in my account on top of these 300 shares, unless it gets silly cheap. The thought of having 17% in one stock made me move forward with the new covered calls. I could handle that easily if the trend was higher, but as QCOM falls (maybe just on sympathy with the market), I figured I could pocket some profit while I wait for the rebound.
I don’t think QCOM will go below $57. The next stop would be $53 if it does. At $53, I might buy more. The upside looks limited to $66-68 based on the chart. I could see QCOM run towards $75 if they beat earnings estimates and get some multiple expansion. I haven’t yet, but next week I plan to enter a limit order to buy back my calls if they get cheap enough during July. As volatile as this stock is, it could have a nice dip one week and be back up $7-10 a couple of weeks later. Their next earnings call is on July 24th. That’s going to be crucial for me.
I have seven different option contracts (five are on UCO) scheduled to expire in July. I might try to start rolling some of those out farther or just close them within the next few weeks to avoid a ton of work on the final trading day next month. We have company coming in town on the 19th (expiration day) and I have a feeling my attention is going to be pulled away from my computer screens as the big day approaches. If only my parents had not been married on options expiration weekend 50 years ago…