Today, let's consider the post-earnings trade strategy for Broadcom by combining two butterfly options trades. The trade structure in Broadcom stock involves both a long call butterfly and a long put butterfly.
Two things to consider in this trade. First, Broadcom stock is up over 60% over the last twelve months, even after Friday's sharp sell-off. Second, the chip sector has fallen amid sector rotation. This environment could deliver a fair bit of weakness after the bounces in price occur off an "earnings fade."
Put another way, such action gives us two-way motion and another visit to the options butterfly garden.
Also, the latest U.S. employment numbers have given us the customary gyrations in the month of September.
Remember, intraday volatility is quite high historically this month. So, having patience in entering trades will serve your returns well.
As always, we assume that we don't know the direction of either Broadcom stock or the market. But we are able to estimate the magnitude of the move using the ATR (average true range) on the weekly chart. We also check the implied moves that market makers have priced into the move in Broadcom stock in the months ahead.
Broadcom Earnings: A Disappointing Sales Outlook
Broadcom Stock Today: The Setup
Let's first discuss the long call butterfly in Broadcom stock. We position it so the 'long wing' of the trade gives us a likelihood of returns. We use the short wing to finance part of the trade.
Technically, the long call butterfly comprises of a long call spread (a bullish position) and a short call spread (a bearish position) that share the middle strike:
- Buy to open 1 AVGO Oct. 18 155-strike call
- Sell to open 2 AVGO Oct. 18 165 calls
- Buy to open 1 AVGO Oct. 18 175 call
The call butterfly above will cost approximately $1.50, based on recent trading. This is also the maximum loss for this position, or $150 per set of calls. It makes the max profit $8.50 (outside of commissions). Total profits will begin to erode if Broadcom stock stays above 165.
How about the long put butterfly? We position it so the 'long wing' of the trade gives us a likelihood of returns. The short wing finances part of the trade. In a long put butterfly, combine a long put spread (a bearish position) and a short put spread (a bullish position).
Both spreads share the middle strike as follows:
- Buy to open 1 AVGO Oct. 18 135 put
- Sell to open 2 AVGO Oct. 18 125 puts
- Buy to open 1 AVGO Oct. 18 115 put
The put butterfly above will cost $0.73 (the max loss for this position), resulting in a max profit of $9.27 (outside of commissions). Total profits will begin to erode if AVGO stays below 125.
If we take both sides of these trades, we court a maximum exposure of around $2.23. And this opens room for a potential profit in Broadcom stock all the way to $7.77, or $777 per spread position.
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
The goal of taking the unbalanced butterflies like the one above? Take advantage of higher implied volatility as the undercurrent of markets shift influences traders to participate in an outsized move.
Looking at key chart levels, relative resistance to the upside in Broadcom stock sits right around 167. That price level looks likely to bring sellers if rotation continues.
Key Price Levels
Meanwhile, price support for Broadcom stock sits near 130. That should bring buyers to the chart if dip-buying is still on the table.
The strategy result provides three choices to exit the trade in Broadcom stock. One, sell both butterfly spreads once the middle strike of either spread is tested. This means we look at setting an alert for 165 and for 125. Why? We are looking for either butterfly to deliver the positive results we are looking for here.
Two, sell the spreads once it hits your loss threshold as determined by personal risk. This will happen with extreme price movement. Three, sell the first spread that hits its middle strike and leave the opposing spread to recover if market gyrations continue.
You may also sell the spreads into the week before expiration, if all is going well and you have decided to hold the trade into closer to the end of expiration. Yet I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
