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Is Broadcom Due for a Bounce?

Option bulls are picking up BRCM's August 34 calls

by 7/11/2012 12:44:20 PM
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The shares of Broadcom Corporation (NASDAQ:BRCM - 31.48) are dancing around breakeven today, but it looks like a few options speculators are betting on the stock to enjoy a short-term rally. So far today, the equity has seen roughly 5,100 calls cross the tape -- more than double its average intraday call volume, and nearly five times the number of BRCM puts exchanged.

Upon closer inspection, the majority of the calls have changed hands at the out-of-the-money August 34 strike, which has seen volume of more than 2,600 contracts on open interest of fewer than 2,300, pointing to new positions. Plus, the bulk of the back-month calls have crossed at the ask price, suggesting they were purchased. By buying the calls to open, the traders are expecting BRCM to muscle atop the $34 level within the next several weeks -- which encompasses the company's turn in the earnings spotlight on July 24.

Speaking of BRCM earnings... Deutsche Bank's Ross Seymore this morning trimmed his third-quarter revenue forecast for a slew of chipmakers, Barron's reported. While the analyst is still upbeat on the sector, a "weaker macro environment" prompted him to reduce his third-quarter sales outlook for BRCM to $2.09 billion from $2.12 billion.

Widening our sentiment scope, most analysts remain devoted to BRCM's bullish bandwagon. In fact, the stock sports 26 "strong buys" and two "buy" endorsements, compared to five lukewarm "holds" and just one "sell" or worse rating. Plus, the average 12-month price target on the security stands at $42.48, implying expected upside of about 34% to BRCM's closing price of $31.53 on Tuesday.

On the other hand, today's preference for bullish bets in the options pits marks a change of pace among short-term traders. The stock's Schaeffer's put/call open interest ratio (SOIR) -- which measures options slated to expire within three months -- stands at 0.99, just 10 percentage points from an annual high. In other words, short-term options players have rarely been more put-heavy toward BRCM during the past year.

However, this abundance of pessimistic positions could work to BRCM's advantage. Currently, the July 30 and July 31 strikes are home to about 4,200 and 6,900 puts outstanding, respectively. In the near term, this put open interest could translate into options-related support for BRCM.

In fact, the $30-$31 neighborhood has served as support for more than two years. At last check, BRCM is trading just north of this area, which is also now home to the equity's 80-month moving average. This trendline has limited the stock's pullbacks since mid-2009, and could reinforce support here.

Monthly Chart of BRCM since April 2009 With 80-Month Moving Average

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