Broadcom was added to the IBD 50 last week, and the stock is showing multiple green check marks in its IBD Stock Checkup.
Broadcom stock looks very strong technically, sitting above the 21-, 50- and 200-day moving averages.
Implied volatility is toward the lower end of the 12-month range, so it's better to look at debit spreads rather than credit spreads.
Today we're looking at a bull call spread on Broadcom stock.
A bull call spread is a bullish debit spread that is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade, but also limits the upside.
Going out to the July expiration, a 630-strike call option was trading around $32.35 on Friday, and the 640 call was around $27.20.
Maximum Profit $485
Buying the 630 call and selling the 640 call would create a bull call spread. The trade cost would be $515 (the difference in the option prices multiplied by 100). The maximum potential profit would be $485 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy, so if Broadcom stock closes below 630 on July 21, the most the trade could lose is the roughly $515 premium paid.
Potential gains are also capped above 640. So no matter how high Broadcom stock might go, the most the trade could profit is $485.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 635.15.
Managing The Broadcom Option Trade
In terms of trade management, if the stock dropped below 610, I would consider closing early for a loss.
According to the IBD Stock Checkup, AVGO stock is ranked number 1 in its group and has a Composite Rating of 99, an EPS Rating of 96 and a Relative Strength Rating of 88.
The earnings trade on The Trade Desk explained May 10 worked well for those who took part. A bull put spread trade on Wingstop we discussed April 17 has also done well and can be closed early.
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Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ
