Broadcom Ltd Stock Misses the Chip Rally, But You Don’t Have To

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avgo stock - Broadcom Ltd Stock Misses the Chip Rally, But You Don’t Have To

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So far, 2018 has been a volatile year for the stock markets. But Broadcom Inc. (NASDAQ:AVGO) has been especially frisky as it seemed many +/-20% moves this year. The company has been a whirlwind of headlines.

Donald Trump’s presidency has complicated matters because, as a foreign company, Broadcom was blocked from buying U.S. assets. So the strategy was to redomicile to make the process easier.

Last night, AVGO reported to earnings and a beat on the top and bottom lines. The stock is a bit on the headline perhaps because the forward guidance was in line. These days investors want to see statements of confidence from management for the future.

I disagree because a cautious management team is a wise one that I want on my side. We have a slew of global threats to the economy so AVGO guiding in line is sane move. The U.S. is in the middle of negotiations with the world to try and avoid a global tariff war. So caution is recommended.

So today I share a trade that bullish Broadcom stock hoping to capitalize on what other investors fears. AVGO came into its earnings up 15% since May, so a small dip does not alarm me.

Momentum stocks like this are difficult to trade. On the way up they look like they are perpetually about to correct, and on the way down they look like they’re headed into an abyss. They leave no clear points of entry.

To make it easier I use options to trade stocks like AVGO. I don’t buy the shares outright to put $260 at risk immediately. Instead, I use options so I can build a pad for my trade. I always assume that I am not catching the perfect point of entry therefore I see it necessary to leave room for error.

AVGO stock is not cheap. It sells at a 60 price-to-earnings ratio which is three times that of Apple Inc (NASDAQ:AAPL) for reference. So, in this case, I am counting on the history of Broadcom delivering results for my value proposition.

Technically, for the last 18 months, AVGO stock has been trading inside a wide horizontal channel. This gives me proven support levels. In March of 2017, the stock broke out from $225 per share and has used that zone for support since. There have been six significant and successful tests of support so I am confident that it will continue to hold through 2018 and beyond. The current macroeconomic conditions favor stocks as long as we don’t get a new black swan event.

The Trade: Sell AVGO Jan 2019 $175 put for $2.75. This is a bullish trade that does not require a rally to profit. Here I have an 85% theoretical chance of success. But I would accrue losses below $172.25.

Selling naked puts is daunting especially these days. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell AVGO Jan 2019 $175/$170 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.

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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/avgo-stock-plunges-profit-from-it/.

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