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Broadcom Calls Heat Up Ahead of Expiration

BRCM's options crowd took profits and established new bullish bets

by 7/20/2012 8:59 AM
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The shares of Broadcom Corporation (NASDAQ:BRCM - 32.45) gapped higher yesterday, enjoying a halo lift from celebrated earnings in the tech sector. Against this backdrop, several option bulls took profits ahead of July expiration, and it looks like a slew of options speculators are betting on BRCM to extend its upward momentum in today's session.

By the closing bell, BRCM had seen roughly 36,000 calls cross the tape -- about five times its average single-session call volume, and nearly eight times the number of BRCM puts exchanged. Digging deeper, it appears a handful of traders liquidated their now in-the-money July 31 calls, which saw open interest decline by more than 1,000 contracts overnight. Plus, the bulk of the calls changed hands at the bid price, underscoring our suspicions of seller-driven volume.

Meanwhile, the July 32 call saw close to 7,200 contracts exchanged, with a healthy portion of the volume traded at the ask price. In addition, call open interest at the soon-to-expire strike jumped by more than 2,800 contracts overnight, hinting at buy-to-open activity. By purchasing the calls to open, the traders are expecting BRCM to continue its climb north of $32 in today's session, which represents the remaining lifespan of the options.

However, even before yesterday's tech rally, the options crowd was initiating bullish positions on BRCM at a rapid-fire rate. In fact, on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day call/put volume ratio of 8.09, indicating that traders have bought to open more than eight calls for every put during the past two weeks. What's more, this ratio stands higher than all but 3% of the readings taken over the past year, suggesting options players are implementing optimistic positions at a near annual-high clip.

But options traders aren't the only group with high hopes for BRCM. Currently, the stock boasts a whopping 26 "strong buys" and two "buy" endorsements from analysts, compared to five lukewarm "holds" and just one "sell" rating. Likewise, the average 12-month price target sits at $42.02, representing a premium of nearly 30% to BRCM's closing price of $32.45 on Thursday, and in territory the stock hasn't explored since March 2011.

As alluded to earlier, the shares of BRCM gapped higher yesterday, topping their 20-day moving average for just the second time this month. However, the equity is still staring up at its 60-day trendline, which has contained the majority of BRCM's rally attempts since early April.

Broadcom is slated to report earnings on Tuesday, July 24.

Daily Chart of BRCM since March 2012 With 20-Day and 60-Day Moving Averages


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