Broadcom reports earnings this week. Mike Khouw says this trade could be a winner
watch nowWe often fail to appreciate just how big Broadcom is. While significantly smaller than Nvidia, Google or Apple, Broadcom shares are knocking on a $2 trillion valuation. Five years ago, only two compani...
watch now
We often fail to appreciate just how big Broadcom is.
While significantly smaller than Nvidia, Google or Apple, Broadcom shares are knocking on a $2 trillion valuation. Five years ago, only two companies held that distinction. Two trillion dollars isn't what it used to be, but Broadcom's $1.75 trillion market cap is still greater than Tesla, SpaceX, Eli Lilly and JPMorgan, the world's largest bank. And yet the company's earnings garners scant attention compared to those names, to say nothing of Nvidia, which smashed expectations last week.
Still, opportunity abounds, and Broadcom (AVGO) is scheduled to report Q3 earnings after the market close on Wednesday. The stakes are high, particularly after the last earnings proved disappointing. Shares fell nearly 13% the following day and ~23% over the next month. Semis in general have languished since.
For options traders, the setup offers an interesting mix of elevated implied volatility, technical ambiguity, and the lingering shadow of last quarter's dramatic sell-off. Market sentiment does matter. I like to think of it as the market holding a bit of a grudge, and Broadcom's Q2 print is still fresh in the minds of investors. Despite delivering fundamentally solid numbers, the stock fell because Broadcom didn't raise its 2027 AI revenue target.
This context has injected a healthy dose of fear into current options prices. Broadcom's implied move is ~8% by the end of the week. Technically, Broadcom is also torn. It appears to be consolidating just below its 150-day moving average, a level it fell below on Aug. 19 after the announcement of an expanded partnership between Marvell and Google. However, the Commodity Channel Index (CCI) is flashing positive, suggesting that underlying momentum may be quietly building.
A moderately bullish play here, taking advantage of elevated options premiums, is selling an out-of-the-money (OTM) cash-covered put ~10% below Friday's closing price while simultaneously selling an upside call spread. The goal is to collect a total net credit that at least matches or exceeds the width of the call spread such that even an extraordinary upside move would not result in a loss.
The example below collects nearly $7 or more than 1.8% of the current stock price, in less than four weeks (more than 25% annualized). If the stock remains relatively flat or even rallies through the implied upside move but then gives back some of those gains shortly thereafter, as Nvidia did this past week, the rapid post-earnings IV crush improves the probability of profit.
The downside risk, of course, is that if management once again disappoints on forward AI revenue guidance, the Q2 drop could repeat itself, and one may be compelled to purchase the stock at ~$328/share. Time will tell whether a 10% discount in that case would prove to be enough of a bargain.
The trade:
- Sell Sept. 25 $335 put
- Sell Sept. 25 $430 call
- Buy Sept. 25 $435 call