Broadcom (AVGO) is due to report earnings Dec. 11 after the market close. The options market is pricing in a 10.1% move in either direction on Broadcom stock.
Let’s analyze how we can structure an option trade that fits the view that one, Broadcom stock will stay within the expected range, and two, the response to the earnings report is likely to be positive.
Broadcom stock has consistently stayed above the lower end of the expected range for the last four earnings announcements.
Taking the at-the-money put and call for the Dec. 12 expiration, we can see that the expected range is 10.1%. Now that we know the expected range, let’s find a bull-put spread that has a break-even price roughly 10.1% below the stock price.
How To Price This Bull Put Spread
Selling the Dec. 11-expiration 355-strike put and buying the 350 put with the same time expiry would create a bull put spread. Further, this spread recently traded for around 85 cents a share. That also means a trader selling this spread would receive $85 in option premium on a 100-share contract and runs a maximum risk of $415.
That represents a 20.5% return on risk between now and Dec. 12 if Broadcom stock remains above 355. If Broadcom stock closes below 350 on the expiration date the trade loses the full $415.
The break-even point for the bull put spread is 354.15, which is calculated as 355 less the 85 cents in option premium per share as part of the contract.
There is little room for adjustment with short-term trades such as this held over earnings. A 20% return in two weeks would be nice, but the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance and a bullish outlook for the stock.
Meanwhile, this bull put spread trade on Goldman Sachs (GS) has done very well and can be closed early for a nice profit.
Ratings On Broadcom Stock
Investor’s Business Daily gives Broadcom stock a Composite Rating of 99 out of a best-possible 99, an Earnings Per Share Rating of 99 and a Relative Strength Rating of 95. According to IBD Stock Checkup, Broadcom also ranks first in the Electronics-Semiconductor Fabless industry group. Further, the group ranks 20th out of the 197 industries covered by IBD.
Broadcom is a global technology leader that designs, develops, and also supplies a broad range of semiconductor and infrastructure software solutions.
Its products power industries from networking, broadband, and wireless communications to data centers and enterprise software. Further, that makes it a critical player in modern digital infrastructure.
Headquartered in San Jose, Calif., Broadcom has grown through innovation and strategic acquisitions. Among its recent purchases was VMware, acquired to expand Broadcom’s enterprise software portfolio.
Please remember that options are risky, and also that investors can lose 100% of their investment.
Gavin McMaster is founder and operator of Options Trading IQ, which offers instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ.
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