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Not only did Broadcom Corporation (NASDAQ: BRCM) fall to $25.23 in intraday trading on Monday, but it also notched a second consecutive close south of the $26 mark -- two events that have not occurred since July 2009. These notable milestones didn't deter yesterday's option players from targeting the September 26 calls, though, as they bet on BRCM to retake this level over the next several weeks.
Jumping right in... The majority of the 10,151 calls traded at the September 26 strike changed hands on the ask side. Implied volatility (IV) rose 1.2 percentage points, and open interest tacked on 8,706 contracts overnight --the largest increase of any strike -- making it safe to assume that a fresh batch of bullish bets was initiated. The volume-weighted average price (VWAP) for the calls was $0.59, meaning traders will begin to profit with each step above $26.59 (strike plus the VWAP) BRCM takes through the close on Sept. 20. This breakeven mark represents expected upside of 4.9% to the stock's current price of $25.35.
Should the equity fail to topple the strike price over the next four-plus weeks, the most the traders have risked is the initial premium paid. With IV at this strike deflated relative to BRCM's 20-day historical (realized) volatility (28.7% vs. 59.8%), the speculators can rest easy knowing they picked up these short-term options at a relative bargain.
Similar to sector peer QUALCOMM, Inc. (NASDAQ:QCOM), calls have been preferred in BRCM's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day call/put volume ratio has grown to 12.24 from its Aug. 1 reading of 4.79. What's more, the current ratio ranks in the 99th percentile of its annual range, indicating calls have been bought to open over puts with more rapidity just 1% of the time within the past year.
This trend has translated into a heavy accumulation of calls at the aforementioned September 26 strike, where 13,749 contracts reside (the majority of which have been bought to open). Going forward, this could create an options-related speed bump for BRCM, as these positions begin to unwind ahead of expiration.
The expectations for Broadcom Corporation (NASDAQ: BRCM) are high outside of the options arena, as well, which is puzzling given the stock's 23.5% year-to-date deficit. In fact, two-thirds of covering analysts maintain a "buy" or better recommendation toward the security, while the consensus 12-month price target of $34.57 represents a brow-raising 36.4% premium to present trading levels. However, a number of analysts have started to jump ship on this underperformer. Should BRCM's technical struggles persist, a continued capitulation from the brokerage bunch could create a contrarian headache for the stock.