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Broadcom Corporation (BRCM) Bulls Target Multi-Year Highs

Call buyers are gambling on Broadcom Corporation toppling the round-number 40 strike

by 6/3/2014 2:32 PM
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Option Brief: Broadcom Corporation (NASDAQ:BRCM) has tacked on another 2.6% this afternoon to trade at $35.75, following yesterday's news-induced 9.3% pop. Today's gains come in the wake of a flurry of bullish brokerage notes -- and as my colleague Beth Gaston noted earlier, this is simply business as usual for BRCM shares, which have historically outperformed in June. This two-day rally is having a sizable effect on the stock's options pits, where intraday call volume outpaces the typical amount by a nearly 8-fold margin. What's more, the equity's 30-day at-the-money implied volatility (IV) is 5.2% higher at 22.4%, signaling elevated demand for short-term contracts.

Nevertheless, it's the August-dated series that's attracting the most attention this afternoon. In particular, BRCM's August 40 call leads all other strikes, with close to 18,000 contracts on the tape. The vast majority have crossed at the ask price, IV has moved higher, and volume dwarfs the 20 contracts in open interest at the strike. If that's not enough, data from the International Securities Exchange (ISE) confirms a significant portion of this activity is of the buy-to-open variety.

Today's out-of-the-money call buyers are looking for continued gains from BRCM over the next two-plus months. Specifically, they need the shares to finish north of breakeven at $40.27 -- strike plus the volume-weighted average price (VWAP) of $0.27 -- at the close on Friday, Aug. 15, when the contracts expire. This represents territory not explored since April 2011, and gains are theoretically unlimited beyond the breakeven mark. By contrast, the traders risk losing no more than the initial premium paid, should the calls expire out of the money.

With today's run higher, Broadcom Corporation's (NASDAQ:BRCM) year-to-date advance has shot above 20% -- roughly five times that of the S&P 500 Index (SPX). Fundamentally speaking, representatives of the semiconductor issue are set to take the stage shortly at the Bank of America Merrill Lynch Technology Conference in San Francisco.

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