An Options Strategy for Broadcom Stock Ahead of Earnings

Broadcom Financial Report Summary

Broadcom (AVGO) is set to reveal its financial results after the market closes on December 11th. The options market indicates a 10.1% potential movement in either direction for its stock.

Let’s explore how to structure an options trade based on the idea that Broadcom will stay within this expected range and that the earnings report response will likely be positive.

Historically, Broadcom has outperformed the lower expectation in its last four earnings releases.

Looking at the at-the-money puts and calls expiring on December 12th, the anticipated range is indeed 10.1%. With that in mind, we can identify a bull put spread where the break-even point is roughly 10.1% below the current stock price.

Pricing the Bull Put Spread

To create a bull put spread, one would sell a 355-strike put and buy a 350-strike put, both expiring on December 11th. This spread has been trading near 85 cents per share. Thus, if you sell this spread, you’ll receive an option premium of $85 while risking up to $415 on a 100-share contract.

This arrangement offers a risk-return ratio of about 20.5% if Broadcom remains above 355. However, if the stock closes below $350 by expiration, the entire $415 could be lost.

The break-even point for this bull put spread is calculated at 354.15, which is found by subtracting the 85 cents premium from the 355 strike price.

In such short-term trades, profit adjustments are quite limited. A 20% profit over two weeks would be nice, but the risk of a total loss is very real. Because of this, this type of trading is probably more suited for those with a high risk tolerance and a positive outlook on the stock.

On a related note, trading this bull put spread above Goldman Sachs (GS) has also shown promising results, allowing for the chance to close early with notable profits.

Rating of Broadcom Stock

Investor’s Business Daily provides a solid evaluation of Broadcom stock, giving it a score of 99, which is the best possible rating. The ratings for earnings per share and relative strength stand at 99 and 95, respectively. Notably, Broadcom ranks #1 in the Electronics and Semiconductor Fabless industry group, which itself is positioned 20th among 197 industries evaluated by IBD.

Broadcom is a global leader in technology, focusing on a wide array of semiconductor and infrastructure software solutions.

The company’s offerings power diverse sectors, from networking and broadband to enterprise software. It plays a crucial role in the backbone of modern digital infrastructure.

Based in San Jose, California, Broadcom has expanded through both innovation and strategic acquisitions, including VMware, to enhance its enterprise software capabilities.