Broadcom is breaking out after recent support at its 200-day line and a move above its 21- and 50-day lines. The stock is highly rated and earned a spot on SwingTrader yesterday. Traders with the mindset that Broadcom stock will stay above 155 for the next few weeks could look at a bull-put-spread trade. Here's how to set it up.
Broadcom Stock Today: The Setup
A bull put spread has two components: a short put that brings in premium and a long put with a lower strike price that offers protection in case the stock falls more than expected. This makes a bull put spread a defined-risk strategy. You always know the worst-case scenario in advance.
These credit spreads benefit from time passing so you can profit if the stock trades sideways, higher and even sometimes if it trades slightly lower.
With Broadcom stock trading around 166 today, we can use the Sept. 20 expiration and sell a 155 put while buying a 150 put for around 1.35.
Selling this spread generates roughly $135 in premium with a maximum risk of $365.
If the spread expires worthless, that would be a 37% return in 31 days — provided Broadcom stock is above 155 at expiration.
Risks And The Break-Even Point
The maximum loss occurs if Broadcom stock closes below 150 on Sept. 20. In that case, the premium seller loses $365 on the trade. But Broadcom could fall to zero and the loss would not go beyond that level.
The break-even point for the trade is 153.65. That is calculated as 155 less the 1.35 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received, which in this case would be $135.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
High Ratings For Chip Stock
According to IBD Stock Checkup, Broadcom ranks No. 2 in the fabless semiconductor group. It has a near-perfect Composite Rating of 98, an EPS Rating of 87 and a Relative Strength Rating of 95.
These ratings, especially the technical action, made it a compelling choice for IBD's SwingTrader. Our short duration before expiration is in line with a short-term trade.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
