Avago Technologies Earnings Preview: 2 Trades for AVGO Stock

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Analog semiconductor maker Avago Technologies Ltd (AVGO) will step into the earnings limelight after the close of trading tomorrow afternoon. Expectations are high for Avago’s fourth-quarter report, but lingering bearish sentiment and the potential for a technical breakout make AVGO stock a ripe option trading candidate.

Diving into the numbers, Wall Street is expecting earnings to rise 19.6% to $2.38 per share for Avago in the fourth-quarter, versus $1.99 per share a year ago. Revenue, meanwhile, is anticipated to be up 14.9% at $1.85 billion.  

Sentiment among analysts is running quite bullish heading into the report. According to WhisperNumber.com, Avago’s whisper number comes in at $2.41 per share — three cents better than the Street’s estimate.

Furthermore, data from Thomson/First Call reveals that 23 of the 24 analysts following Avago stock rate it a “buy” or better, with nary a “sell” rating to be found. The 12-month price target of $163.50 represents a healthy premium of 25% to yesterday’s close.

Options traders, on the other hand, have taken a decidedly bearish stance heading into tomorrow’s report. Currently, the December put/call open interest ratio for AVGO stock rests at 1.04, with puts outnumbering calls among options set to expire within the next month. This ratio balloons to 1.37 for the weekly December 4 series, which is directly impacted by this week’s quarterly report.

12-1-2015 AVGO
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Overall, weekly Dec. 4 series implieds are pricing in a potential post-earnings move of about 7.7% for AVGO stock. This places the upper bound at $140, while the lower bound lies at about $120.  

As you can see from the technical chart, these levels have acted as key support and resistance for Avago stock for the past several months.

While a breakout of this trading range could have major implications for AVGO, it doesn’t seem likely unless Avago has a major surprise waiting in its fourth quarter report.

2 Trades for AVGO Stock

Put Spread: Traders looking to side with the bears in Avago’s options pits might want to consider a December $120/$130 bear put spread. At last check, this spread was offered at $3.50, or $350 per pair of contracts. Breakeven lies at $126.50, while a maximum profit of $6.50, or $650 per pair of contracts, is possible if AVGO closes at or below $120 when December options expire.

Call Spread: On the other hand, traders looking to side with the bulls in the brokerage community might want to consider a December $130/$140 bull call spread. At last check, this spread was offered at $3.63, or $363 per pair of contracts. Breakeven lies at $133.63, while a maximum profit of $6.37, or $637 per pair of contracts, is possible if AVGO closes at or above $140 when December options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/avago-technologies-earnings-preview-2-trades-avgo-stock/.

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