Options Action

Should You Bet Your Chips on Qualcomm?

Daniel Acker | Bloomberg | Getty Images

After the close on Wednesday, Qualcomm reported better than expected 4th quarter earnings, beating on both the top and bottom lines despite weak earnings from major customers like Apple and Nokia. The stock gapped up 6%, and ended up closing 4% higher on the day. Option trading was bullish, and the biggest trade of the day was the purchase of 4,000 April 70-strike calls for $0.98 each, which was done with the stock at $66.49. This trade will profit if Qualcomm is above $70.98 (6.8% higher) at April expiration.

In their showed that revenue increased by 29% year-over-year, and earnings per share came in at $1.26 versus expectations of $1.13. The strong earnings should have come as no surprise, given that Qualcomm is a dominant force in the smartphone market. They own 48% of the smartphone processor market by revenue, and collect 3-5% of the sale price of every CDMA-enabled device because of their patents. But investors want growth, and Qualcomm will have to look beyond smartphones for that in the future. Their future looks to be tablet processors, where they currently have only a 4% market share.

Management is committed to growing this division of the company, and two new tablet processors are set to be released later this year. The two new processors, SnapDragon 600 and 800, will be 75% more powerful, reach speeds up to 2.3 gigahertz, and handle Ultra HD recording. Right now, Apple and NVIDIA are the top players in the tablet processor space, but Qualcomm hopes it can leverage its reputation for making the best-performing smartphone processors to get their products into new tablets.

Currently, Qualcomm processors currently power three of the iPhone's top competitors: the HTC 8x, the Nokia Lumina, and CDMA version of the Samsung Galaxy S III. If Qualcomm's new chip is adopted in more models, the stock could take off. The chips will be available in the first and second quarters of this year, so investors should watch for news.

This option trade is a low-risk way to profit from this new chip set, because it offers little downside and unlimited upside. Qualcomm has had quite a run over the past few months, and I would be cautious about buying the stock at these levels. But I do think it is a great play on mobile computing, and would own calls to profit if it continues to take market share.

Disclosures: I have been long stock and short calls for clients, and now might be the time to buy them back.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."