Stocks quoted in this article:
Short-term call players are flocking to Broadcom Corporation (NASDAQ:BRCM - 33.00), with investors likely gambling on a post-earnings bounce for the semiconductor stock. Around midday, the equity has already seen roughly 19,000 calls change hands -- about six times its average intraday call volume, and more than three times the number of BRCM puts traded.
Most of the action has centered on the near-the-money November 33 and 34 calls, which have seen around 5,300 and 4,600 contracts exchanged, respectively. Volume has exceeded open interest at the 33 strike, and implied volatility on the 34-strike call was last seen 1.5 percentage points higher -- both signs of new initiations. Plus, a healthy portion of the calls have traded at the ask price, hinting at buyer-driven volume.
By purchasing the calls to open, the buyers are anticipating some short-term upside for BRCM. Specifically, the volume-weighted average price of the November 33 calls is $1.25, meaning the buyers will profit if BRCM topples the $34.25 marker (strike plus premium paid) within the next few weeks. Meanwhile, the VWAP of the November 34 calls is $0.82, indicating a breakeven level of $34.82. However, even if BRCM confesses to weaker-than-expected earnings tonight, the call buyers' losses are capped at the premium paid at initiation.
Thanks to increasing demand ahead of earnings, though, BRCM's short-term options are fetching a rather pretty penny. The stock's Schaeffer's Volatility Index (SVI) has risen significantly over the past month, and now stands at 35% -- in the 46th percentile of its annual range. In other words, near-term options are relatively expensive at the moment.
Speaking of... BRCM's near-term options crowd was already call-heavy ahead of today's session. The stock's Schaeffer's put/call open interest ratio (SOIR) sits at 0.56, indicating that calls nearly double puts among options expiring in three months or less. Plus, this ratio rests at a 12-month low, implying that short-term speculators haven't been more call-biased at any other time during the past year.
However, prior to today, sentiment appeared to be shifting. 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 0.68 ranks in the 84th percentile of its annual range. Or, in simpler terms, option traders have bought to open BRCM puts over calls at a faster-than-usual clip during the past couple of weeks.
Moving on, one group that's decidedly optimistic is the brokerage bunch. BRCM boasts 28 "strong buys" and four "buy" endorsements from analysts, compared to four middling "holds" and not a single "sell" or worse suggestion. Likewise, the average 12-month price target on the stock stands at $41.83 -- representing a premium of 25% to BRCM's closing price of $33.42 on Monday, and in territory the stock hasn't explored since February 2011.
Technically speaking, the shares of BRCM have surrendered more than 10.5% in the past 52 weeks, and were last seen 1.2% lower in the $33 region. From a longer-term perspective, the security has spent the past 18 months or so bouncing between support in the $31-$32 region and resistance in the $38 area.
Fundamentally, the company has exceeded analysts' bottom-line earnings estimates in each of the past four quarters, according to Thomson Reuters. On average, the Street is expecting BRCM to report third-quarter earnings of 77 cents per share tonight.