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Second-quarter earnings season is underway amid newfound strength in the major stock indexes. The coming week is chock full of high-profile earnings reports, including results from Qualcomm (QCOM). QCOM stock has surged off lows along with many other semiconductor stocks, helping the Nasdaq composite lift above its 50-day moving average.
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Sentiment has been positive around QCOM stock and other chip stocks as the $52 billion chips bill works its way through the Senate. It’s a bipartisan bill that basically subsidizes domestic chip production.
QCOM Stock Strengthens
QCOM stock surged nearly 10% in late April when it reported accelerating earnings and sales growth. Profit jumped 69% to $3.21 a share, with revenue up 41% to $11.16 billion. Overall chip sales jumped 52% year over year. But licensing revenue dipped 2% to $1.58 billion.
Investors also liked bullish revenue guidance from QCOM, with guidance coming in about $1 billion above expectations.
Qualcomm still gets the bulk of its revenue from its handset chip business. The company’s RF front-end business, which provides technology that enables 5G connections, delivered revenue of $1.16 billion, up 28% from the year-ago period.
Results from Qualcomm are due Wednesday after the close. The Zacks consensus estimate is for adjusted profit of $2.86 a share, up 49%, with revenue up 35% to $10.88 billion.
Watching The FAANG Stocks
Buyers pushed Netflix (NFLX) stock higher after its Q2 report. The rest of the FAANG stocks report in the coming week, including Facebook-parent Meta Platforms (META), Apple (AAPL), Amazon.com (AMZN) and Google-parent Alphabet (GOOGL).
Out of the four, Meta Platforms and Alphabet are the laggards at this point. Both stocks are still near their 50-day lines, while Apple and Amazon have rallied sharply above their 50-day lines.
Apple reports earnings late Thursday, as does Amazon.
Apple rallied for a bit, then reversed sharply lower when the company reported earnings in April. Earnings, total revenue, iPhone revenue and Services revenue all came in better than expected, but CFO Luca Maestri said Covid-related supply constraints could hurt sales in the current quarter by $4 billion to $8 billion.
For the current quarter, Apple is expected to earn $1.13 a share, down 13% year over year. Look for revenue to be up less than 1% to $81.86 billion.
Besides the FAANG stocks, building products firm Carlisle Companies (CSL) is in a good setup, with results due Wednesday after the close. It’s forming a double-bottom base and could make sense for an earnings option trade, although it’s lightly traded in the options market.
Diabetes firm Dexcom (DXCM) reports Thursday after the close.
Options Trading Strategy
A basic options trading strategy around earnings using call options allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works.
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Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price.
First, identify top-rated stocks such as QCOM with a bullish chart. Some might be setting up in sound early-stage bases. Others might already have broken out and are getting support at their 10-week moving average for the first time. Some might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.
In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price. A put option gives the holder the right to sell 100 shares of a stock at a specified price. You earn profits when the stock falls below the strike price with a put option.
Check Strike Prices
Once you’ve identified some bullish earnings setups for a call option, check strike prices with your brokerage. Make sure the option is liquid, with a relatively tight spread between the bid and ask. Look for a strike price just above the underlying stock price (out of the money) and check the premium. The premium ideally should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective. But keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most that can be lost is the amount paid for the contract.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price.
Beyond QCOM Stock: The Option Trade In Dexcom
Here’s how a call option trade recently looked for Dexcom.
When Dexcom traded around 83.75, a slightly out-of-the-money monthly call option with an 85 strike price (Aug. 19 expiration) came with a premium of around $5, or 6% of the underlying stock price at the time. On the surface, it was a pricey trade, but it’s also a monthly option so there’s a lot of time until expiration.
One contract gave the holder the right to buy 100 shares of Dexcom stock at 85 per share. The most that could be lost was $500 — the amount paid for the 100-share contract.
When taking the premium paid into account, Dexcom would have to rally past 90 for the trade to start making money (85 strike price plus $5 premium).
A call option for Apple wasn’t as pricey. When Apple traded around 155.25, a slightly in-the-money weekly call option with a 155 strike price (Aug. 5 expiration) offered a premium of $4.70, or 3% of the underlying stock price.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight
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