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Skeptical Broadcom Corporation (BRCM) Trader Risks $3 Million

A call seller bets Broadcom Corporation will remain below $40 over the next few months

by 8/13/2014 2:43 PM
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Broadcom Corporation (NASDAQ:BRCM) has edged 0.3% higher this afternoon, and is currently resting near $37.71. Elsewhere, options volume has picked up considerably, with 48,000 contracts on the tape, versus an average daily volume of 13,000 contracts.

Most of the session's activity can be traced to a block of 32,737 November 40 calls, which changed hands just before 1 p.m. ET. The lot traded at the bid price of $1.01 apiece, and just 1,564 contracts reside in open interest here, making it safe to assume the calls were sold to open for an initial net credit of about $3.3 million (premium collected * number of contracts * 100 shares per contract). Trade-Alert confirms the block was sold to open, and speculates these contracts may be covered calls.

By writing the contracts, the trader is skeptical BRCM shares will topple the 40 strike by November options expiration. If the contracts expire out of the money, the seller will pocket the entirety of the initial credit collected. However, if the shares rally past the strike between now and then, the call writer could be assigned, and risks theoretically unlimited losses -- that is, unless he owns a sufficient number of shares to cover the sold calls.

On the charts, Broadcom Corporation (NASDAQ:BRCM) is up a healthy 27% year-to-date. However, since gapping higher in early June, the equity has been spinning its wheels in the $37-$39 range, and traded above $40 in just one session during that time frame.


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