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Trader Bets on Huge Qualcomm Move

Monday, 6 May 2013 | 1:32 PM ET
Qualcomm Inc., Chairman and CEO Dr. Paul E. Jacobs.
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Qualcomm Inc., Chairman and CEO Dr. Paul E. Jacobs.

Can Qualcomm shares get a move on? Based on Monday's action, traders sure think so. They just don't know if those shares will go higher or lower.

Qualcomm options are seeing unusually heavy options activity Monday, with one trader buying 9,400 July 65 straddles for $4.39. A straddle is an option spread that involves the purchase of both a call and a put of the same strike and expiration. Because the purchaser of a straddle owns both a put and call, that trader can profit from a move either up or down in the stock.

The key is that the stock must move by more than the total premium paid in order for the trade to break even. In this case the straddle will be profitable if Qualcomm is either above $69.39, or below $60.61, by July expiration.

Straddles are very sensitive to changes in implied volatility of the stock, and this is usually the main reason that they are bought and sold. Implied volatility is the market's estimation of the move that a stock could make.

Because this trader is buying options, even if Qualcomm doesn't actually move far, if the market begins to believe that the stock will make a big move, then this trade will become profitable.

However, the large amount of premium in this straddle means that time decay will be eating away at it, so this trader will benefit only if implied volatility rises in the short term, or if Qualcomm breaks out sooner rather than later.

The break-even points on this trade put the stock either at a new 52-week high or back at new year-to-date lows. Thus, this trader is looking for Qualcomm to make a significant move one way or the other.

The earnings that Qualcomm reported on Wednesday morning met expectations for $1.17 earnings per share on $6.12 billion of revenue, and the company raised its revenue forecast for 2013 by about $600 million.

Additionally, in March, the company announced a $5 billion stock buyback program, and it pays a 2.2 percent dividend that has been rising steadily.

(Read More: Qualcomm Earnings Meet, but Q3 Guidance Is Light)

If I had to choose the direction in which this stock will break, I would guess it would move to the upside, making Qualcomm a great candidate for investors looking for a dividend growth stock. It could be a good way to potentially add alpha relative to the broad market.

Disclosures: None to report.

Brian Stutland is managing member of Stutland Equities and a contributor to CNBC's "Options Action." Follow him on Twitter: @BrianStutland

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