Broadcom (AVGO) is set to announce its earnings on December 11, following the market’s closing bell. The options market currently anticipates a potential movement of 10.1% in either direction regarding Broadcom’s stock price.
With this information, we can propose an option trade that operates under the assumption that Broadcom’s stock will remain within this expected range, while also factoring in a favorable market reaction to the earnings report. Historically, Broadcom stock has remained above its lower expected boundary during the last four earnings announcements.
For options expiring on December 12, we can establish a bull-put spread by selling the December 11 expiration 355-strike put and simultaneously buying the 350-strike put. Recently, this spread traded around 85 cents per share, ensuring that a trader selling this spread would earn $85 in premium for a standard 100-share contract, with a maximum risk of $415. This setup implies a 20.5% return on risk, provided Broadcom’s stock stays above 355. However, a close below 350 at expiration would result in a total loss of the $415.
The break-even point for this trade is calculated to be at 354.15, determined by deducting the 85 cents premium from the 355 strike price. Given the high-risk nature of these short-term trades, particularly before earnings reports, this type of trade is suited for traders with a robust risk tolerance and a bullish outlook on Broadcom.
In addition to this potential strategy, Broadcom’s stock has received commendations from Investor’s Business Daily, which rates it at a composite score of 99 out of a possible 99, as well as an Earnings Per Share Rating of 99 and a Relative Strength Rating of 95. Broadcom stands out in the Electronics-Semiconductor Fabless industry, ranking first, with the industry itself positioned 20th out of 197 sectors tracked by IBD.
As a prominent global technology leader, Broadcom is deeply ingrained in various key areas such as networking, broadband, wireless communications, and data centers, making it essential in the digital infrastructure landscape. The company, headquartered in San Jose, California, has expanded its influence through innovation and strategic acquisitions, including the recent purchase of VMware to enhance its enterprise software offerings.
It’s crucial to recognize that trading options involves significant risks, including the possibility of losing the entire investment. Investors should approach these trades with caution and awareness.