Update – Broadcom (AVGO) Leverage in the Hole

by CC September 11, 2017 3:17 pm • Trade Updates

Going into (Broadcom) AVGO earnings on August 24th, we detailed a fairly simple over-write for those long the stock. Following the earnings, the stock was lower, with the call sale providing a little bit of relief. After the drop, we looked at an overlay that could help long holders even more if the stock were to bounce. From August 28th:

With AVGO now 244, we again look at the prior highs in the stock, and try to position for a bounce that adds more than $5 in potential leverage, has an effective sale price in the stock at the prior highs, and whose most likely outcome is collecting a small premium sale:

vs 100 shares of existing AVGO (244) Buy the Sept 250/255 1×2 call spread for a .50 credit
  • Buy 1 Sept 250 call for 3.30
  • Sell 2 Sept 255 calls at 1.90 (3.80 total)

The stock has bounced a bit, and now with AVGO 247.75 this overlay, which initially took in a .50 credit is worth .70 (for a 1.20 profit). This is good news on both overlays because with the stock down 7.25 since earnings, we’ve been able to soften the blow by about half that, without taking in much risk at all besides what has acted as several gtc to sell orders above. These techniques obviously apply to other stocks in a portfolio than AVGO. I am a particular fan of 1×2 call spreads in stocks that have just dropped (especially for a credit) as they work as almost a supercharged overwrite, where a small credit can be recieved if the stock goes nowhere, but leverage to the upside if the stock bounces.

As far as this specific 1×2, the stock is still below the 150 strike, meaning if the stock closes on Sept expiration here or below, some of the profits are lost, and it simply takes in the initial .50 credit. But the potential remains for it to add up to 5.50 in profits if the stock goes to 255. If that were to occur before Sept expiration if would mean 7.50 in profits with the stock flat from the initial over-write. For management purposes you want to let this run if the stock looks like it can get above 250, and if it starts heading lower nothing needs to be done and it will expire as a .50 credit. If the stock heads to 255 it can be closed for a profit and potentially re-established as an over-wright out a few months and higher. The lesson here is that the overlays can be used to generate income and leverage on an existing stock position without a ton of risk.