2 Apple Suppliers Seeing Red-Hot Options Volume

Apple Inc. suppliers Broadcom Ltd (NASDAQ:AVGO) and Skyworks Solutions Inc (NASDAQ:SWKS) are seeing notable call options volume after encouraging iPhone 7 reports

Sep 13, 2016 at 12:21 PM
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Apple Inc. (NASDAQ:AAPL) suppliers Broadcom Ltd (NASDAQ:AVGO) and Skyworks Solutions Inc (NASDAQ:SWKS) are bucking the broad-market downtrend, along with their proverbial skipper, thanks to encouraging pre-order data for the iPhone 7. What's more, AVGO and SWKS call options are heating up, as speculators roll the dice on more upside for the stocks.

AVGO
is up 0.4% at $165.14, bringing its year-to-date lead to 13.8%. The shares have been chugging higher since late 2013, and touched a record high of $179.42 in late August before pulling back to test their 20-week moving average.

Broadcom Ltd calls are trading at 1.6 times the average intraday pace, and have nearly doubled puts so far. It looks like some traders may be buying to open the out-of-the-money September 170 call -- the most active option thus far -- to bet on a rally north of $170 by the end of the week, when front-month options expire.

SWKS is faring even better, up 2.4% at $69.95. From a longer-term perspective, the stock has spent most of 2016 bouncing along between support in the $60 region and resistance in the $75-$78 area, but last month broke above its 10-month trendline for the first time since July 2015.

In the options pits, SWKS calls are flying off the shelves at eight times the normal midday clip, on pace for an annual high. In fact, the intraday put/call ratio of 0.14 is lower than 99% of all other readings from the past year. Digging deeper, much of the action appears attributable to a healthy bull call spread, with the trader buying to open 5,000 weekly 9/23 72.50-strike calls and selling to open 5,000 weekly 9/23 75.50-strike calls, for a net debit of $0.49 per pair of options. 

By implementing a long call spread instead of simply buying the 72.50-strike calls, the strategist has lowered her cost of entry, which represents the maximum risk on the play. Specifically, the speculator will forfeit the entire $245,000 ($0.49 x 100 shares per contract x 5,000 spreads) if SWKS remains beneath $72.50 through options expiration on Friday, Sept. 23.  However, the trader's maximum profit potential is limited by the sold call, topping out $2.51 per spread (difference between strikes minus net debit), or $1.25 million ($2.51 x 100 shares per contract x 5,000 spreads), no matter how high SWKS rallies north of $75.50.

Today's appetite for bullish bets runs counter to the recent trend, though. The equity holds a 10-day put/call volume ratio of 1.05 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- higher than 80% of all readings taken in the last year. In other words, traders have scooped up long SWKS puts over calls at an accelerated pace during the past two weeks. 

Echoing that skepticism, short interest on Skyworks Solutions Inc (NASDAQ:SWKS) surged nearly 20% during the most recent reporting period. Now, more than 13 million SWKS shares are dedicated to short interest, representing a week's worth of pent-up buying demand, at the stock's average daily trading volume.

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