This blog post was written by Chris McKhann.
Qualcomm hasn't been able to break higher, and now traders are using options to play the downside.
QCOM stock is down 1.2 percent Monday to $36.14 as of this writing; and while it had been pushing toward recent highs, it has not been able to get above the $37 level from the beginning of January. The low of $28.16 set on Nov. 21 represented almost exactly a 50 percent fall from the August high of $56.88.
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The big trade of the day in this name involved the March 30 puts and March 40 calls, according to OptionMonster's tracking systems. The puts traded at $0.77, above the theoretical price and indicating a buy of the 12,950-share block. The calls traded for $0.98, well below the theoretical value, showing a sale of the same number of contracts at the same time in one trade.
Both of these trades have a bearish nature. With the credit of $0.22 created, this trade will profit up to $40.22 and will then lose dollar for dollar above that level. The credit will hold down to the $30 strike, and then increasing gains will be made.
This trade is known as a "risk reversal" but could have been done against a long stock position, creating a "collar" position. The collar reduces both downside risk and upside potential of owning long stock.
(See OptionMonster's Education section:Collars.)
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Jon 'DRJ' Najarian is a professional investor, CNBC contributor, and cofounder of OptionMonster.com.