It was a week of good news for Qualcomm (QCOM, $54.45, up $2.02) as the company reported earnings that were slightly ahead of Wall Street’s expectations. The icing on the cake was the fact that the company also settled its ongoing lawsuit against Nokia (NOK, $28.13, up $0.84).

The company had delayed its earnings announcement at the last minute on Wednesday and was suppose to report after the market closed. Once the delay came, speculation was in full-force until the Nokia deal was announced. As far as earnings, Qualcomm reported revenue of $2.8 billion and $0.55 a share. Wall Street had expected $2.71 billion and 55 cents. Qualcomm raised guidance in June and they were right on target. The earnings report alone may have lifted the stock on Thursday but it was the Noka news that sent the stock soaring.

Under the terms of the agreement, Nokia basically has a 15-year license to all of Qualcomm’s patents for use in Nokia’s infrastructure equipment. Nokia has also agreed not to use any of its patents directly against Qualcomm which paves the way for Qualcomm to integrate Nokia’s technology into its chipsets that are used in wireless phones.

It was a huge win/win for both companies but Qualcomm was the biggest winner. The rumor mill is already churning that Nokia could be using Qualcomm chips down the road. The old saying, “if you can’t beat ‘em, join ‘em”, would seem to fit Nokia if that were to happen and it looks like things could be headed that way.

On July 2, we made up a Telecom Watch List and Qualcomm was by far the best one on the list and the only one I liked. At the time, I mentioned the stock was setting new 52-week highs in mid-June and was the best positioned to take advantage of the surging demand for smart-phones. Apple (AAPL, $162.12, up $3.09) and Research in Motion (RIMM, $117.43, up $2.88) may be leading the charge when it comes to smart-phones but Qualcomm and its recent stock gains are clearly in the lead over the past month.

The rally in Qualcomm has put the October 50 calls (AAOJJ, $6.55, up $1.25) I mentioned at $2.05 well in-the-money. They are now up over 200% and I told you then that they could be a steal four months from now. Well, it only took a month and hopefully Qualcomm can continue its momentum a little while longer. The stock could be setting up for a run to $60 and getting off to a good start today would second that notion.

Side Note: I also mentioned AT&T (T, $31.40, down $0.30) on July 2 when it was trading at $33. I didn’t like it for a call option trade at the time because the stock was hitting 52-week lows. Guess what. It still is. We were watching the October 35 calls (TJG, $0.50, down $0.10) and I said if they got below a $1.00 then we would look at them again. Well, we’re looking at them again and I still don’t like a trade.

By waiting a month and noticing AT&T was in a downtrend, we just bought ourselves two more months of time premium. The January 35 calls (TAG, $1.13, down $0.11) are now approaching our old entry price on the October 35 calls of $1.00. However, I’m not ready to swim with the sharks just yet and it may be longer then expected for AT&T to rebound. The stock has been getting hit with a slew of downgrades and its latest earnings showed some serious weakness in their wireline business. That means AT&T is losing customers and they could be losing them at an accelerated pace. Hold off until further notice.

Rick Rouse
Rick@OptionsMentoring.com

We’ve been talking about a few Biotech and Drug stocks over the last few months and I wanted to talk about a few more that have been making noise. There is always downside risk to drug stocks. They may not have much of a pipeline or if they don’t get FDA approval for a drug then the stock will likely get creamed. Clinical trials can have a big impact on the stock as well. Either way, given the recent activity in the sector, there appears to still be a shift into some of these stocks.

I mentioned Johnson & Johnson (JNJ, $69.03, up $0.37) a few weeks ago as it headed into its earnings report. I said if we got a good earnings report, J&J could challenge its 52-week high of $68.85 back in May. The company beat Wall Street’s expectations by five cents and raised its full-year profit forecast by the same amount, to a range of $4.45 to $4.50. The August 65 calls (JNJHM, $4.20, up $0.05) were profiled at $2.30 and although they aren’t up 100%, they’re pretty close. Set stops at $3.80.

Pfizer (PFE, $18.89, up $0.08) is showing signs of life. The stock was just under $20 back in May and Wall Street seems to have all but forgotten this company. I mentioned then that the stock has been in a 5-year downtrend after hitting a high of nearly $50 in 2000. The stock hit a low of $17.12 about a month ago but has rebounded after reporting decent earnings. I only say decent because they only reported 2% growth. This is one of the reasons why we haven’t gone long with a LEAP call or anything because Pfizer just isn’t a growth stock anymore. I do like the safety of the stock (to a degree) and the 7% dividend but I don’t like Pfizer as far as options go.

Biogen Idec (BIIB, $69.50, down $1.78) fell 2.5% Friday but the stock has been on fire since the start of July, rising from $55 to $72. The 52-week high is $84.75. The August 70 calls (IHDHN, $2.30, down $1.20) fell 34% but could be back in play if Biogen Idec can make a run at its highs. The company has a great pipeline, has been raising estimates and has a partnership with Genentech with the drug Rituxan.

Gilead Sciences (GILD, $54.51, up $1.83) is also challenging its 52-week high. In early June the stock hit a high of $56.95 and looks to have a second wind. Volume was brisk in the August 55 calls (GDQHK, $1.35, up $0.62) as traders continued to like the news the company has started a late-stage study of a new HIV treatment candidate.

Amylin Pharmaceuticals (AMLN, $29.49, up $1.48) could be headed back into the $30’s despite reporting a wider-than-expected quarterly loss last week. That’s the first red flag for this one. It’s hard to buy call options on stocks that are losing money but Amylin could hit it big with its diabetes drug Byetta. The company could have a blockbuster on its hands and the good news is that it has nearly $900 million in the bank to invest in its pipeline and survive. For extreme risk takers, the August 30 calls (AQMHF, $1.35, up $0.50) rose 59% Friday.

And look who’s back in town…ImClone Systems (IMCL, $46.37, up $1.19). You know, the stock Martha Stewart got a federal indictment for? To make a long story short, she avoided a loss of $45,000 by selling nearly 4,000 shares, or her entire position, in late 2001 after receiving an insider tip. That tip cost her five months in prison, and her stock, Martha Stewart Living (MSO, $7.80, up $0.71) continues to trade under $10. Back to ImClone.

The stock can be volatile and is capable of make breath-taking moves. Lately they have been up. ImClone is up 15% for July and on Thursday reported earnings that Wall Street “accepted.” The company has several drugs in development that are pretty far along though Erbitux remains its bread-and-butter. There are other possible treatments with Eribitux so stay tuned. The 52-week high for ImClone is $49.18. The August 45 calls (QCIHI, $2.40, up $0.25) would be worth $5.00 if ImClone can hit $50 by August 15.

Rick Rouse
Rick@OptionsMentoring.com

Genentech (DNA, $96.00, up $1.35) continued higher throughout the week as it awaits word from a “special committee” that is evaluating the $44 billion bid to buy the company. Swiss pharmaceutical giant Roche is on the other end of that bid and is also waiting for an answer to its $89 a share offer. The “special committee” is made up of Genentech’s three independent board members which have to review the offer with their lawyers.

I mentioned the tug-of-war the two sides would play and Genentech said Thursday that neither it nor the “special committee” has any commitment to agree to a deal with Roche. Genentech also called the offer “unsolicited and unexpected.” Basically it’s Genentech’s way of saying, “Thanks for the slap in the face. We really appreciate your offer but no thanks.”

Roche’s offering price didn’t even register a premium of 10% based on Genentech’s closing price on the Friday preceding the offer. No matter what kind of homework you do, as some of these research firms claim they do, it still doesn’t add up to a fair price based on the premium.

There was a time where many deals on Wall Street seemed to get done fairly quickly with a 50% offer. Of course, that was back in the Internet boom and crash days of the stock market but the point is Genentech is hardly an Internet start-up company. I estimated (guessed) Roche would have to bid somewhere in the $125 a share neighborhood and it now looks like it will be anywhere from $100-$110. Still not $125 but you never know.

When I said it would cost $1.59 to buy one euro last Tuesday, I should have switched it around. In other words, Roche’s bid of $89 a share is around 56 euros which is the currency Roche would use to finance the deal. As you can see, Roche came in with a really low-ball offer and it can easily afford to raise its bid. And if you really want my opinion, Roche needs Genentech more than Genentech needs Roche. Genentech’s drug, Avastin, is the key to everything and Wall Street’s estimates could be rising for the drug if other cures are found.

I mentioned how there weren’t many calls available above the 100 strike price last week but that has all changed. The August 95 calls (DWNHS, $2.20, up $0.64) were at $1.50 when I profiled them but they were risky because they expired in three weeks. For those of you who took on the added risk, you have been rewarded with a 50% gain so far. I liked the September 100 calls (DWNIT, $1.75, up $0.55) a little better and they were cheaper at $0.65 a contract. Sometimes it pays to buy cheap out-of-the-money options and it appears like this is one of those times. A stop of $1.30 gets you at least a 100% return.

We should have a clearer picture this week on what’s next between the two companies.

Rick Rouse
Rick@OptionsMentoring.com

Chipotle Mexican Grill (CMG, $69.01, down $14.79) has dipped below $70 again after opening the trading session at $74.29. The stock traded to a high of $75.50 but the bears have been firmly in control since the opening bell. I mentioned the after-hours trading was a good indication that the stock would probably open around $75 which we got.

I went out on a limb with the August 70 puts (CMGTN, $4.70, up $3.30) because trading options around an earnings announcement is the riskiest way to lose all of the cash you put up for a trade. However, sometimes you get such a good feel for a company, how it trades, and how it reacts to earnings announcements that it just doesn’t matter.

Chipotle is a stock that I have followed since it become a public company. Google (GOOG, $488.16, down $1.06) is another company I have followed since its IPO. The point is I rode Chipotle on the way up when Wall Street was drooling over their earnings announcements and profiled many call options when the stock made its run to $155. Now, I’m simply playing Chipotle on the way down.

The puts were profiled at $1.60 in the blog so we basically have a 200% gain on our hands. The puts have hit a high of $5.80 for the day when the stock hit a low of $67.40. That is probably going to be the peak for the day but it’s hard to say with the Dow struggling going into the final two hours of trading. The Dow is down 212 points to 11,420 and appears to be headed even lower. Set stops at $4.25 or you can sell half today and let the rest ride on Friday. This was ony a one or two-day trade so the position should be closed before the weekend, regardless.

Rick Rouse
Rick@OptionsMentoring.com

Wachovia (WB, $17.65, up $0.86) was up another 5% yesterday following Tuesday’s massive 29% gain despite an earnings report that I still find hard to fathom. The stock hit a low of $11.65 right after Tuesday’s anouncement of a $9 billion loss, rebounded that same day, and hit a high of $19.55 on Wednesday. Wachovia was expected to post a loss of $0.78 a share and came in at a loss of $1.27. I’ve heard of short-covering and even the “naked” short selling is being addressed but for Wachovia to post these kinds of gains, the shorts must be convinced that some sort of rally will hold.

Too bad for us because the whipsaw action has taken us out of some exceptional trades. The Wachovia January 15 calls (WBAC, $5.40, up $0.91) were profiled at $1.30 and were trading at $2.15 before the earnings announcement on Tuesday. When Wachovia opened lower to start the session the puts opened lower and then rebounded strongly. The exit point was $2.60 but some of you probably left the position open.

As fate would have it, Wachovia has rebounded for all the wrong reasons but for those of you that held onto the January 15 calls, continue to enjoy it. The calls hit a high of $6.30 for the day so many of you are looking at 200%-300% gains. Just make sure you set stops again as the calls will certainly continue to make wild price swings.

Interesting too was the action in the October 17.50 calls (WBJA, $3.00, up $0.65) yesterday. They opened the session at $2.30 and traded as high as $4.00 as 18,000 contracts traded hands. They could also do well if Wachovia can continue its march higher.

Rick Rouse
Rick@OptionsMentoring.com

Chipotle Mexican Grill (CMG, $83.80, up $2.14) missed earnings by a penny and it paid for in after-hours trading last night. The stock was down $9, or 10%, to $75. Other than missing by a penny, it was an earnings report that deserved an A+.

For 2Q, Chipotle reported an increase of 23% as the company earned $24.5 million, or 74 cents a share. Wall Street was looking for 75 cents. Chipotle also disappointed on the revenue side as they company reported $341 million while the Street was looking for $344 million.

Same-store sales were up 7% for the quarter and it expects more of the same for the rest of 2008. The company also said it plans to open 130 to 140 new restaurants during the year which shows that its brand continues to grow despite the tough economy. As consumers continue to change their spending habits to fight high everything prices, Chipotle has become the cheaper way to go out and have an incredibly good meal and at a cheap price. That seems to be working despite the increases in menu prices because they are getting more customers.

Of course, we had a short position in Chipotle when we bought the August 70 puts (CMGTN, $1.40, down $0.55) which were out-of-the-money. They still are but all we are looking at is a one or two-day trade. The after-hours action was a good indicator of where the stock is headed when the opening bell rings this morning. If Chipotle opens around $75, the puts could be worth $2.00-$2.50 which is all we are looking for. The puts were profiled at $1.60 in the blog so a 50% gain would be $2.40. If we can get an open on the puts right there or a little higher, set stops at $2.35-$2.40.

Again, you may have to watch the action a little bit today to get a good feel on where Chipotle may trade on Friday and I’ll try an update the situation later today in another blog. The magnet I was telling you about pulled Chipotle back in the $70’s, let’s just hope it holds when trading begins.

Rick Rouse
Rick@OptionsMentoring.com

Chipotle Mexican Grill (CMG, $82.50, up $0.84) will announce earnings after the market closes today and it will be interesting to see how the company is holding up. A slowing economy, higher menu prices and a salmonella scare could factor into where this stock opens on Thursday.

We have had good success buying put options on Chipotle in the past but we picked our entry points carefully. It’s kind of tough picking a position today with the earnings announcement because it’s hard to say how Wall Street is going to react. McDonald’s (MCD, $59.64, down $0.47) beat estimates today by eight cents (!) today and look at what its stock is doing.

Last time out, Chipotle beat Wall Street’s expectations by four cents a share. However, the stock fell 10% that day and closed right around $100. After the earnings were out of the way, the breakdown in the stock set up two beautiful trades in late May and again earlier this month. McDonald’s is trading lower because it told the Street it expects beef costs to rise 8%-9% and chicken costs to jump anywhere from 5%-8%.

Chipotle has said it was going to be tougher for them to hold gross profits at current levels due to the continuing rise in food costs. Although the company didn’t plan on a company-wide price increase it looks like that is happening now as gross margins may be getting squeezed.

There’s a magnet for Chipotle at $70 and the stock was below this level just one week ago. I got a good read on the breakdown to $70 and even called it a month ago. I still think $70 is way too much for this stock but the bounce off the $70 level is strong. The August 70 puts (CMGTN, $1.60, down $0.35) are out-of-the-money but we know Chipotle is capable of $10 swings on any given day.

This is one of those calls that might get me in trouble but I like the August 70 puts for a quick two-day trade. I’m looking at it this way. I’m using some of the huge profits I made in the past two trades to do a third. I’m wouldn’t risk too much but I think Chipotle heads back to the $70’s.

Rick Rouse
Rick@OptionsMentoring.com

It’s been a rough couple of days for Merck (MRK, $31.33, down $4.00). The stock followed Monday’s 6% decline with a 11% drop on Tuesday after lackluster earnings and some damaging information for the company’s cholesterol drug Vytorin.

On Monday when Merck was at $36, I mentioned that earnings were delayed and that pending news was due out concerning Vytorin. Merck came out later that day and said that researchers reported the drug was ineffective in stopping progression of a condition called “aortic stenosis”, or a small blockage of the heart’s aortic valve. That’s when the selling intensified.

You just had this feeling that it wasn’t going to be good news. I mentioned investors had bought the August 37.50 calls (MRKHU, $0.10, down $0.50) and the August 40 calls (MRKHH, $0.05, down $0.25) on Friday in anticipation of a good earnings report come Monday morning. Afterall, investors were expecting double-digit growth and there is a shift into Drug stocks right now, so I can see why we had heavy call volume on Friday.

When Monday came and I noticed that earnings were delayed, I started watching the volume in the August 35 puts (MRKTG, $3.80, up $2.65) and I mentioned they were the most active in the August put chain. They were selling for 85 cents at the time. Yeap, the percentage gain on that one comes out to 335% as of yesterday’s closing price.

Although the reaction or the sell-off is overdone, the puts may have ran their course and it would be wise to set stops at $3.40, which sets your stop at a 300% gain. Merck is another company that looks attractive at these levels if you only deal with stocks and it’s too early to even think about going long any call options. For the meantime though, enjoy the short position you have but make sure your exit points are in place.

Rick Rouse
Rick@OptionsMentoring.com

Yahoo (YHOO, $21.40, down $0.27) announced earnings after the closing bell yesterday and in after-hours trading the stock held up well. For Q2, the company reported earnings of $131 million, or $0.09 a share. This was a drop from $161 million, or $0.11 a share, in the year-earlier quarter. Wall Street was expecting $0.11-$0.12. Basically they missed by two or three pennies depending on who you talk with.

Some are saying the results were disappointing while others are saying Yahoo is getting a break because it could have been worse. The fact that the company did not change its full-year forecast is probably the silver lining that is holding the stock up.

That’s not really much to go on though. It’s amazing that Wall Street is so critical on some companies while giving others a kitchen pass. Yahoo gave a range so wide that you could drive a tank through it when it kept its full-year forecast in the $7.35 billion to $7.85 billion range, sorta.

The way this really went down was that Yahoo raised the bottom end of its previous revenue outlook to $7.35 billion but lowered its top end to $7.85 billion. The earlier forecast was even wider as it called for $7.2-$8 billion. How’s that for smoke-and-mirrors?

The wild card is Yahoo’s relationship with Google (GOOG, $477.11, up $8.31) which could add up to $800 million in revenue. But even that is still under regulatory review. Yahoo shareholders have suffered enough and their earnings report has more holes in it than a slice of swiss cheese. Still, the stock got some love and was up $0.59 to $21.99 in after-hours trading.

Rick Rouse
Rick@OptionsMentoring.com

You can always expect an extreme move in Apple’s (AAPL, $152.52, down $13.77) stock the day after an earnings announcement. Another thing you can expect is for Apple to beat Wall Street’s expectations — they have for eight straight quarters — and yesterday was no different.

The company reported earnings of $1.19 a share on revenue of $7.46 billion. Of course, Apple is famous for “sandbagging” their numbers, meaning they always forecast at the lower end of earnings. Cisco Systems (CSCO, $21.72, down $0.12) is the King of beating earnings by a penny but when it comes to Apple, it makes Cisco look like a Pawn. Wall Street was expecting earnings of $1.08 so Apple beat by $0.11.

The problem with Apple is that Wall Street no longer rewards the company for its outstanding results; instead it chooses to focus on what Apple says about the future. And Apple dropped a bomb when it said gross margins will dip to 31% for the current quarter, down from 34.8% for the quarter just ended. Although Apple said gross margins would still average 30% for 2009, the news has dropped the stock back to the $150 level.

The drop in gross margins will likely be caused by a drop in prices for the Mac. Apple shipped 2.5 million Macs in the quarter, a record, with desktop shipments growing faster than laptops. Some say an overhaul on the Macs are overdue and Apple did say they were introducing “state-of-the-art new products at prices our competitors can’t match”. It all makes sense with the back-to-school shopping season right around the corner.

Apple doesn’t deserve the sell-off it is getting and the August 150 puts (APVTJ, $5.35, up $2.25) are up 73% today. I don’t think Apple will fall much further so I would be hesitant to buy any puts right now. I do expect the stock to recover and perhaps it will when we get more details on these cool, new products Apple will be releasing.

Rick Rouse
Rick@OptionsMentoring.com