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Trader bets $1.6 million on Qualcomm rally

It's been a rough year so for Qualcomm but one trader is betting big that the stock will rebound – at least by early 2016.

Shares of the tech giant are down 3 percent over the last week, and are off 10 percent year-to-date. However, some traders are taking a bullish view of Qualcomm two weeks before it reports its earnings.

On Wednesday, when the stock's options volume was 1.5 times its daily average, one trader put on a large bet that Qualcomm will rally over 5 percent in the next nine months.

Specifically, a trader bought 20,000 contracts of the January 70-strike calls for $3.52 and paid for some of the trade by selling the same amount of the January 60-strike puts for $2.72, thus making the net cost 80 cents. Since each contract controls 100 shares, the trader is wagering $1.6 million that Qualcomm will trade above $70.80 by January.

A call gives the purchaser the right to buy a stock at a specific price on or before a set date while a put gives its owners the right to sell.

In this particular strategy, known as a risk reversal, the trader breaks even if Qualcomm is above $70.80. Below that price, the trader loses the $1.6 million in premium paid. And should the stock fall below $60 any time before January, the trader could be forced to buy 2 million shares of the stock at that level even if it trades cheaper in the market.

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"What they've done is define a range over the next 10 months," explained Dan Nathan, co-founder of RiskReversal.com.

According to Nathan, the trader may have been eying a four-year chart of Qualcomm that has $60 as a long-term support and $70 as resistance.

From the late 2012 to last quarter of 2013, the stock remained in that range but then rallied to nearly $82 by July 2014. Since then, however, it has been on the decline and stayed between $66 and $70 this month.

"They're looking to define a wide range where they have exposure to upside and to the downside," said Nathan.

According to data compiled by FactSet, the average analyst target for Qualcomm is $75.87, down from their average target of $85.90 a year ago.

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