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Broadcom Traders May Be Calling a Top

Are BRCM shareholders writing covered calls?

by 9/18/2012 12:14 PM
Stocks quoted in this article:

The shares of Broadcom Corporation (NASDAQ:BRCM - 36.76) have muscled higher today, adding to their year-to-date gain of nearly 23%. However, the security is approaching a familiar roadblock in the $38-$40 neighborhood, and it looks like some long-term options traders are betting on limited upside for the shares.

Around midday, BRCM has seen roughly 12,000 calls change hands -- more than three times its average intraday call volume, and more than twice the number of BRCM puts exchanged. Garnering notable attention has been the out-of-the-money January 2013 43-strike call, which has seen close to 2,300 contracts traded on open interest of fewer than 450, pointing to new initiations. However, 83% of the LEAPS have traded at the bid price, suggesting they were sold.

By writing the calls to open, the sellers are expecting BRCM to remain south of the $43 level over the next few months. In the best-case scenario, the calls will remain out of the money and expire worthless, allowing the seller to retain the entire premium received at initiation. If the traders are also BRCM shareholders, they could be writing covered calls to generate income in the event BRCM's recent rally stalls heading into 2013.

From a broader sentiment perspective, pessimistic positions are nothing new for BRCM's options crowd. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.53 stands higher than 69% of all other readings of the past year. Or, simply put, options traders have bought to open BRCM puts over calls at a faster-than-usual step during the past couple of weeks.

Elsewhere on the Street, the brokerage bunch is singing quite the opposite tune. BRCM has earned 26 "strong buys" and three "buy" endorsements from analysts, compared to four lukewarm "holds" and not a single "sell" suggestion. Likewise, the average 12-month price target on the security sits at $41.20 -- in territory not charted since April 2011 -- and BRCM scored another upbeat brokerage note just this morning. Specifically, analysts at RBC lifted their price target on the stock to $46 from $38, and upped their opinion to "outperform" from "sector perform."

At last check, the shares of BRCM have powered 1.8% higher to explore the $36.76 region. As alluded to earlier, though, the equity is staring up at the $38-$40 neighborhood, which has rejected its rally attempts since mid-2011.

Weekly Chart of BRCM since February 2011


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