Broadcom (AVGO) is set to announce its earnings on Thursday after the market closes, with the options market anticipating a notable move of around 7.8% in either direction. This is particularly interesting as it mirrors the expected volatility seen for Nvidia (NVDA) last week.
Last week, financial expert Anne-Marie Baiynd discussed the merits of a long-term covered call strategy on Broadcom stock in Investor’s Business Daily. However, here we will explore a more aggressive strategy involving a short-term bull put spread, which carries higher risks and potentially higher rewards.
A bull put spread is a strategy for traders who believe that Broadcom stock will stay within the predicted range and that the earnings results will be favorably received. Historically, Broadcom has performed well during earnings calls, with only a few significant downturns in recent years.
To implement a bull put spread, traders can consider selling the June 6, 222.50-strike put option while simultaneously buying the 217.50-strike put. This spread is currently trading at approximately 85 cents per share, so selling this spread would generate $85 in option premiums per contract. The maximum risk involved is around $415, translating to a potential return of over 20.5% if Broadcom’s stock remains above the 222.50 mark by the end of the week.
However, traders must remain cautious. If Broadcom’s stock falls below 217.50 at expiration, the full $415 could be lost. With the break-even point set at 221.65, calculated by subtracting the 85-cent premium from the 222.50 strike price, there is a narrow margin for error in this short-term trade.
In the event of a significant drop in the stock price, long-term investors may find opportunities to acquire shares at 222.50 via the short puts and then potentially sell covered calls against that new position.
Broadcom shares are currently holding strong ratings, sitting atop their industry group with a Composite Rating of 99, an EPS Rating of 98, and a Relative Strength Rating of 95, according to IBD Stock Checkup.
It’s critical to note that options trading involves significant risks, and investors could lose their entire investment. This article serves educational purposes and doesn’t constitute a trading recommendation. Always seek advice from a financial advisor before making investment decisions.
Gavin McMaster, an expert in income trading using options, emphasizes the value of patience and discipline when navigating market strategies.
Overall, while the volatility surrounding earnings can present risks, it also opens avenues for discerning traders and investors alike, fueling the potential for strategic financial growth.