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Broadcom Traders Expect Limited Downside

Dissecting put-selling activity on downtrending BRCM

by 10/10/2012 9:19 AM
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The shares of Broadcom Corporation (NASDAQ:BRCM - 33.18) succumbed to tech-sector headwinds yesterday, and are on pace to end the week south of their 10-week and 50-week moving averages for the first time since mid-July. Nevertheless, the options crowd is gambling on limited downside for the equity, with investors selling short-term puts.

By the time the dust settled, BRCM had seen roughly 11,000 puts cross the tape -- more than double its average single-session put volume. Most active was the out-of-the-money November 31 put, which saw more than 5,100 contracts traded. The majority of the puts changed hands at the bid price, and nearly all of the volume translated into new open interest, underscoring our theory of sell-to-open activity.

By writing the puts to open, the sellers are expecting BRCM to maintain a foothold atop the $31 level over the next several weeks. In this best-case scenario, the puts will expire worthless, and the sellers can retain the entire premium received at initiation.

Checking out BRCM's sentiment backdrop, it seems most of Wall Street is in the bullish corner. Short interest accounts for a scant 1.3% of BRCM's total available float, and would take just a session to unwind, at the equity's average pace of trading.

Meanwhile, the stock sports a whopping 27 "strong buys" and four "buy" endorsements from analysts, compared to four "holds" and not a single "sell" or worse suggestion. In the same vein, the average 12-month price target on the security stands at $41.60 -- implying expected upside of 25.3% to BRCM's closing price of $33.18 on Tuesday, and in territory not explored since March 2011.

As alluded to earlier, BRCM is on pace to end the week south of its 10-week and 50-week moving averages, which have played the part of both support and resistance since early 2009. However, the stock could find a foothold in the $30-$32 area -- encompassing the aforementioned put strike – which has contained the bulk of BRCM's pullbacks since early 2010.

Fundamentally, BRCM is slated to report earnings on Tuesday, Oct. 23. From an historical standpoint, the company has surpassed the Street's bottom-line estimates in each of the past four quarters, according to Thomson Reuters.

Weekly Chart of BRCM since March 2009 With 10-Week and 50-Week Moving Averages

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