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Shorting puts and calls in Broadcom Inc (AVGO) stock is much cheaper now that the 10-for-1 stock split has occurred, making the AVGO stock price 1/10th its prior price. As a result, it's easier to short OTM puts and calls.
AVGO stock is trading today for $171.81 per share. I discussed how options will be easier to execute in my July 7 Barchart article, “Broadcom Looks Cheap Ahead of Its July 15 Stock Split - Shorting AVGO Puts Is a Good Play.”
This article will show why it's now cheaper and easier to do this kind of out-of-the-money (OTM) short put and call play.
Shorting Puts and Calls is Now Easier
For example, in that article, I showed that the July 19 expiration put option chain had a $1,670.00 strike price that could be shorted for a bid price of $38.80. That provided the short seller a 2.30% yield (i.e., $38.80/$1,670), but they would have had to first secure $167,000 in cash with the brokerage firm.
Today, the $167.00 strike price put option expiring this Friday, July 19, has a $1.20 premium on the bid side. That provides the short seller an ample 0.7185% yield (i.e., $1.20/$167.00) in just 5 days.
But the investor only has to secure just $16,700 to make $120 in income with one short put contract. That is 10 times easier than before.
The same applies to shorting covered calls (i.e., out-of-the-money calls after first purchasing 100 shares per call shorted). For example, the $176.00 July 19 call now trades for $1.35 on the bid side. That represents a call yield of 0.786% (i.e., $1.35/$171.74) for the covered call investor.
But here again, it's easier to do than before since now an investor can short one covered call after purchasing 100 shares for just $17,181 (i.e., 100 x $171.81). That is 1/10th the amount of money it would have cost before the split.
AVGO Stock Is Still Cheap
In my last Barchart article, I showed how AVGO stock could be worth significantly more at $208.49, or over 21% over today's price. This was based on its strong free cash flow (FCF) and FCF margins.
That is based on a 40% FCF margin estimate on the projected $60.66 billion in revenue for the year ending Oct. 2025, or $24.26 billion in FCF. After using a 2.5% FCF yield valuation metric, this implies the stock will have a $970.4 billion market cap (i.e., $26.24b/0.025 = $970.4b). That is 21.6% over its $797. billion market cap today, or $208.50 (i.e., 1.216 x $171.47) per share.
Analysts tend to agree that the stock is still undervalued. After adjusting for the 10-for-1 stock split, Yahoo! Finance shows an average price target of $197.22 for AVGO stock from 30 analysts. That represents an upside of 14.8% over today's price.
In addition, Barchart says that its survey shows a mean price target of $186.52 for AVGO. Moreover, AnaChart.com, a new sell-side analyst tracking service, shows that the average of 26 analysts' price targets is $186.66. That is 8.7% higher than today.
The bottom line is that both from an FCF yield standpoint and using analysts' price targets AVGO stock still looks cheap. Now that its 10-for-1 stock split has executed it's much easier and cheaper to short OTM puts and calls.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
