AVGO Analysis

Broadcom Ltd. (AVGO)

Update 12/7/2017: AVGO beat the Street’s expectations by 2.2%.The price rose by nearly $20 in overnight trading but then fell during the day and eventually returned to its starting point. I exited early for a debit of $7.33, with shares at $2679.75, for 13.9% of maximum potential profit.

Zacks had anticipated a small earnings surprise, with an earnings surprise predictor (ESP) score of 0.45 in the context of a bullish rank (2).

The ephemeral upward move post-announcement was in line with the ambiguities of the trend, with a positive direction index (+DI) of 29.2, a negative (-DI) of 16.0 and a weak trend signified by an average directional index (ADX) of 18.4.

Shares rose by 3.3% over the position’s lifespan of less than a day, or a +1,203% annual rate. The options position produced a 16.0% return for a +5,826% annual rate.

The expected move with an 85% accuracy was $13.64, with a $10 profit zone. In actuality the stock closed the first trading day after earnings were published at precisely the same price as it had closed before the announcement.

The overnight swing exceeded post-earnings moves of the past year, which showed an average of $9.98, a maximum of $19.94 and a central tendency of $4.01. The close to close difference, of course, was well within those past ranges.


AVGO publishes earnings on Wednesday after the closing bell.

I shall use options that trade for the last time nine days hence, on Dec. 15.

Implied volatility stands at 38%, which is 3.4 times the VIX, a measure of the volatility of the S&P 500 index.

AVGO’s IV stands in the 81st percentile of its annual range and the 73rd percentile of its most recent broad movement.

The price used for analysis was $261.52.

In order to lower the cost of the position for this expensive stock so as to fit within my trade-sizing rules, I have decided to build an iron condor structure.

Premium: $8.50 Expire OTM
AVGO-iron condor Strike Odds Delta
Calls
Long 287.50 90.5% 11
Break-even 276.00
Short 267.50 63.7% 39
Puts
Short 255.00 60.5% 37
Break-even 243.50
Long 235.00 89.6% 9

The premium is 42.5% of the width of the position’s wings.

The risk/reward ratio is 1.4:1.

The zone of profit in the proposed trade covers a $10 move either way. The biggest immediate move after each of the past four earnings announcements was $19.94, and the average was $9.98. After eliminating the maximum and minimum post-earnings movements, the central tendency is $8.92.

The bid/ask spread is 8.7%.

Decision for My Account

I have entered a position on AVGO as described above. The stock at the time of entry was priced at $261.14.

By Tim Bovee, Portland, Oregon, Dec. 6, 2017

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License
Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

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