Qualcomm, Inc. (QCOM)
The better-than-expected outlook from the San Diego, CA-based company inspired a number of analysts to up their ratings and price targets on the stock.
An equity collar initiated in the January 2011 contract was a nice strategy play today.
- The investor responsible for the trade sold 12,500 calls at the January 2011 $52.5 strike for
a premium of $0.60 apiece
- He partially financed the purchase of the same number of puts at the January 2011 $44 strike at a premium of $0.80 each
- The investor paid a net premium of $0.20 per contract for the collar, which was tied to stock purchased at $48.45
- The purchase of QCOM shares indicates the investor is bullish on the mobile-phone chip maker and hoping to see the rally continue ahead of expiration next year
Selling the calls to buy puts is a nice strategy because the puts offer downside protection in case the price of the underlying shares slides lower, while the sale of calls cheapens the price of this protection. Additionally, selling calls provides an effective exit strategy on the long stock position. If the calls land in-the-money by expiration, the investor may have the shares called from him at $52.50 apiece. In this scenario, he exits the position having gained roughly 8.35% on the rally in the price of Qualcomm's shares to $52.50 from $48.45.