Apple Supplier With Options on Sale

AVGO stock has been higher a month after every other signal

Jan 29, 2019 at 2:12 PM
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Tech behemoth Apple Inc. (NASDAQ:AAPL) is set to report earnings after the close today, and while AAPL option premiums are inflated ahead of the event (as expected), the same can't be said about iPhone supplier Broadcom Inc (NASDAQ:AVGO). What's more, AVGO shares just flashed a bullish options signal, suggesting now may be the time to buy near-term calls on the outperforming semiconductor stock.

Broadcom suffered its worst session ever in mid-July, as traders and analysts jeered the company's M&A efforts. However, since touching an annual low below $200 on July 12. the equity has rebounded roughly 34%, and even logged a fourth-quarter gain, while most of the stock market was trading in new-low territory. The shares are now within striking distance of their mid-March high, last seen trading around $264.72.

AVGO stock chart jan 29

As alluded to earlier, AVGO's short-term options are attractively priced at the moment. The equity's Schaeffer's Volatility Index (SVI) of 26.7% is higher than just 18.6% of all other readings from the past year, suggesting near-term options are pricing in relatively low volatility expectations for the shares.

There have been four other times when AVGO was within 2% of a 52-week high while simultaneously sporting an SVI in the bottom 20% of its annual range. A month after these signals, the security was higher every time, and averaged a gain of nearly 6%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar surge from current levels would place Broadcom stock north of the $280 marker, and into territory not charted since its November 2017 record peaks.

So, for those Apple bulls who expect a strong earnings report tonight, but who don't want to pay up for AAPL options, buying calls on supplier AVGO -- which could get a halo lift in the event of a solid Apple report -- could be a cheaper alternative.

Most speculators, though, have been taking the opposite approach, buying AVGO puts at a rapid-fire rate. 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 1.23 is in the 91st percentile of its annual range, pointing to a healthier-than-usual appetite for bearish bets over bullish in the past two weeks. Should AVGO extend its journey to new highs, an unwinding of pessimism in the options pits could add fuel to the equity's fire.

 

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