Option Expired: Qualcomm (QCOM)

On April 23, 2010, I purchased shares of Qualcomm (QCOM) at $38.  In addition to owning the shares outright, I highlighted a strategy that could potentially minimize the loss or limit the gain and lower the risk. As the expiration date arrived, this strategy has allowed me to minimized the loss from QCOM falling to $36. Both options (Calls and Puts) are worthless at the expiration and we pocketed the premium.

Let's recap the three scenarios I gave on 4/23/10: 

Scenario 1 (stock rise 18% to $45)

This is an ideal scenario. Gain from stock is 18.42%. The stock gets "called" away and we are no longer owners of the stock. We get to keep the stock with a $0.46 premium and add that to our gain. Total gain is 19.63% in three months.

Scenario 2 (stock stay at $38)

For three months, the stock has done nothing. Given that the company doesn't pay any dividend, our gain is $0.46 from the premium we sold.

Scenario 3 (stock dropped 30% to $26.60)

This is the least ideal scenario because we sold the $30 Put, we have to buy shares when price fall below $30. Given that we bought at $38, our loss would be 30%. We are forced to buy more shares at $30 and take an additional loss of 11%. Here is a little break down of the transaction:

Initial buy: $38 x 100 = $3,800

2nd buy prompted by options: $30 x 100 = $3,000

Total cost = $6,800

Since we collected $0.46 x 100 = $46 our cost is $6,754

We now own 200 shares at $26.60 = $5,320

Our loss is 21.23%

With shares trading at $36, we are somewhere between scenario 2 and 3. In addition to the premium we collected for $0.46, QCOM paid a dividend of $0.19 on 5/26/10 which minimized our loss further. Here are the results (and possible results) based on today's closing price of $36. For simplicity sake, we will exclude the commissions and fees from our calculation.

Without Options and Dividend

$36 - a 5.26% loss. 

With Dividend and no Options

$36.19 - a 4.76% loss. 

With Options and no Dividend

$36.46 - a 4.05% loss. 

With Dividend and Options (outlined strategy)

$36.65 - a 3.55% loss.

It is obvious that using options worked to our advantage. The premium we received is more than twice the dividend paid by the company. Instead of taking in 0.5% in dividends for the quarter, our strategy added additional 1.21%.

A savvy investor may continue to deploy this strategy for another quarter creating an additional income stream besides the dividend (ex-dividend is 8/25/10). Right now a similar strategy would yield an even higher premium as Put option prices have exploded. October $43 Calls are selling at the same price, $0.18 but the Puts have more than doubled in price. The October $30 Put closed the day at $0.67. Selling both would yield an additional $0.85 or 2.36%.

We'll post an update next week after reviewing the situation. For now, we are happy with a 3.55% loss versus a loss of 5.26%.