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Broadcom Stock Options Price in Lofty Pre-Earnings Premium

AVGO shareholders may be initiating options hedges ahead of earnings

Dec 4, 2017 at 10:38 AM
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In its attempt at a hostile takeover over Qualcomm (QCOM), Broadcom Ltd (NASDAQ:AVGO) unveiled a list of 11 nominees for QCOM's board of directors, with a shareholder vote slated for March 6. Qualcomm has since issued a statement, calling the nominees "inherently conflicted" in a buyout attempt that "dramatically undervalues" the chipmaker relative to the benefit it offers Broadcom. After jumping 1% at the open, AVGO stock was last seen trading down 2.8% at $264.04 -- and put buying was picking up.

Though volume is still light in early trading, the weekly 12/8 240- and 250-strike puts are two of the stock's most active options, and it looks like new positions are being purchased at each. If this is the case, the goal is for AVGO to settle the week -- a time frame that includes the company's Wednesday evening earnings report -- south of the strike prices.

More broadly, Broadcom options traders have been buying to open puts relative to calls at a quicker-than-usual clip in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), QCOM's 10-day put/call volume ratio of 0.67 ranks higher than 80% of all comparable readings taken in the past year.

Considering AVGO was scaling record highs before last week's tech selloff, it's possible some of this recent activity -- namely at out-of-the-money strikes -- is a result of shareholders initiating options hedges against any additional downside risk. Whatever the reason, it's getting pricey to purchase premium on the stock's short-term options, as elevated volatility expectations get baked in ahead of earnings. In fact, the security's 30-day at-the-money (ATM) implied volatility (IV) hit a 12-month high earlier, and was last seen at 39% -- in the 99th annual percentile.

Historically speaking, the stock has fared well in the session subsequent to Broadcom's earnings report. Over the past eight quarters, AVGO shares have closed higher the next day six times, averaging a gain of 5.1%. This time around, the options market is pricing in an 8.4% swing, regardless of direction, based on ATM IV data.

Looking at the charts, Broadcom shares are boasting 50.7% year-to-date gain, and hit an all-time peak of $285.68 last Monday, Nov. 27. And while the chip stock sold off with its sector peers last week, it found a foothold near $265, home to its rising 30-day moving average and its October highs. Oppenheimer and Raymond James think there's plenty more upside for AVGO stock, too, with the brokerage firms earlier boosting their price targets to $300 and $335, respectively, with the latter sitting at a 26% premium to current trading levels.


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