After Qualcomm (QCOM) reported that it had demonstrably beat expectations for its third-quarter earnings results, option traders are taking actions that imply they think the share price will drift lower in the future. This may come as a surprise considering that the QCOM share price rose 6% the day after the report was announced.

Qualcomm reported an earnings per share (EPS) of $1.92 and $8 billion in revenue, versus analysts’ predictions of $1.68 EPS and $7.58 billion in revenue. Notably, revenue was up 63% from the same period last year, and earnings per share more than doubled annually. Prior to the announcement, investors had kept the share price of QCOM range bound, with a growing number of call options in the open interest.

Option trading volumes indicated that traders had been buying calls and selling puts; however, option activity after earnings suggest that traders are not confident in QCOM's elevated share price going forward. That's because the day after earnings the share price rose to the upper bounds of the volatility range and has been on a slow downtrend, while option activity implies that traders have been selling calls and buying puts.

Key Takeaways

  • Traders and investors bought shares of QCOM following the earnings announcement.
  • The share price of QCOM rose to the top third of the volatility range, closing well above its 20-day moving average. 
  • Put and call option activity appears to be positioned for the price to decline.
  • The volatility-based support and resistance levels allow for a stronger move to the downside. 
  • This setup creates an opportunity for traders to profit from a reversal in the earnings-base share price increase.

Option trading is literally a bet on the probabilities of the market—a bet made by traders that are, on average, better informed than most investors. The key to maximizing insight into option trading activity is to understand the context in which the price movement took place. The chart below illustrates the price action for QCOM's share price as of Aug. 6, illustrating the setup after the earnings report.

Earnings results for Qualcomm Incorporated (QCOM)

Current Trends

The one-month trend of the stock saw the share price mostly closing above the 20-day moving average before briefly falling below it in the week before the earnings announcement. The price rose to the extreme bounds of the range the day after earnings, before retreating to the middle range, depicted by the technical studies on this chart.

These studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has fallen from the upper portion of this range to the middle bounds. This price move from QCOM shares implies that investors believe the post-earnings share price increase may have been an overreaction.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

Chart watchers can recognize that traders were expressing ambivalence going into earnings, based on the price trend for QCOM closing just above the 20-day moving average. Chart watchers can also form an opinion of investor expectations by paying attention to option trading details. Prior to the announcement, traders appeared to be expecting that Qualcomm shares would move upwards after earnings.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

The recent activity of option traders implies that they consider QCOM shares overvalued and have bought put options as a bet that the stock will close within the box depicted in the chart between today and Aug. 20, the next monthly expiration date for options. The red-framed box represents the pricing that the put option sellers are offering. It implies a 69% chance that QCOM shares will close inside this range or lower by Aug. 20. So sellers are only mildly bearish. However, buyers are snapping up this pricing, suggesting that buyers consider these options underpriced. Since the pricing implies only a 31% chance that prices could close below this red box, it appears that buyers are willing to take those long odds.

It is important to note that open interest on Aug. 6 featured over 375,000 call options compared to roughly 425,000 put options, demonstrating the bias that option buyers had, as traders favored puts over calls by a narrow margin. This normally implies that option traders expect downwards price movement. After earnings, the volatility has decreased dramatically, but the number of call options in the open interest has fallen, and the number of put options remained elevated. This signals that call options are being sold, rather than bought, creating a bearish sentiment.

For the strikes at the money and one step either direction, the put volume far outweighs the call volume. Out-of-the money call option volume declines at a slightly faster rate than out of the money put volume, which would signify that more traders believe that QCOM share prices will fall than those who believe share prices will rise. However, it should be noted that the implied volatility of this call option volume is also declining, indicating that call options, while being traded in large volumes, are being sold more than being bought.

Option pricing for Qualcomm Incorporated (QCOM)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such disparity with plenty of space to run in either direction. This suggests option buyers have a stronger conviction of the price moving lower in the weeks following the report. Although investors and option traders expected positive movement from the report, the share price moved further to the upside than it did after the last earnings report.

Volatility pricing for Qualcomm Incorporated (QCOM)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that there can be a large move in either direction in the near future. After the previous earnings announcement, QCOM shares fell 2.72% in the day following and continued falling the following week. Investors may be expecting the same kind of move in price in the week after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected in the near term; however, there is more room in the volatility range to support a move to the downside.

Wrapping Up

Qualcomm beat analysts' expectations for both EPS and revenue. Revenue increased 63% from the same period last year, and EPS more than doubled annually, causing traders and investors to buy shares in the day after the announcement, before the share price began to retreat toward the middle range on the chart. Option traders appear to be selling calls and buying puts, which translates into a negative sentiment. This activity provides more room in the volatility range for a downward move in the share price in the future.