Back in mid-December I took a look at Broadcom (AVGO), discussed their $100 billion bid for Qualcomm (QCOM) and detailed a bullish defined risk options strategy to play for new highs in Q1 2018 (read here). I have no insight whatsoever whether or not AVGO will prevail in what has become a hostile bid for QCOM (read here and here), but it remains my belief that with or without QCOM, AVGO is a cheap stock and that with any resolution, shares of AVGO likely rally given their current positioning in the wireless chip space and valuation relative to expected growth. AVGO trades a little less than 14x expected fiscal 2018 eps growth of 21% on 18% sales growth.
The trade I detailed on December 18th played for a near-term consolidation and a breakout by mid-March, here was the idea when the stock was $265:
TRADE IDEA: AVGO ($265) BUY JAN / MARCH 280 CALL CALENDAR FOR $8
-Sell to open 1 Jan 280 call at 2.80-Buy to open 1 March 280 call for 10.80
A month later with the short Jan call leg expiring worthless its time to re-evaluate the strategy with the stock $1 lower than where it was on Dec 18th. Now the March 280 call is worth $6.50, or $1.50 lower than the cost of the call calendar. At this point it makes sense to check in on conviction level for a bullish trade idea from current levels and then tweak the trade.
I see four options for trade management:
- Cut losses and sell March 280 call at $1.50 loss.
- Leave $280 call naked long, playing for a move above $288 (which is break-even)
- Sell a Feb 280 call and once again turn into a call calendar, further reducing the premium at risk.
- Sell higher strike call in March to create a vertical call spread and lower the break-even and the premium at risk… or
- Roll the bullish view down by selling the March 280 call and buying a call spread that has a higher probability of being in the money on March expiration.
While we will have no idea when and how the QCOM situation gets resolved, which is likely to be a driver of AVGO’s stock performance near term, it makes sense to target Q1 earnings that are estimated to be in late February or early March. It’s also worth taking another look at the technical set up of the stock, which was fairly constructive a month ago and remains so in this trader’s novice technical opinion. Despite the stock’s monster gains in 2017, AVGO has underperformed the broad market and its peer group in 2018, but the stock’s consolidation above the early November breakout to then new all-time highs and the uptrend from the 1-year lows appears to offer healthy technical support:
So what’s the adjustment? At this point, it makes little sense to hold onto a call so far out of the money, but given the fact that the stock is nearly at the same spot as it was when initiated, I think it makes sense to choose to turn into a call calendar again.
Action: AVGO ($264) Sell to Open 1 Feb 280 call at $2
New Position: AVGO Feb / March Call Calendar for $4.50
The ideal scenario remains that the stock moves higher over the next few weeks towards 280, the Feb 280 call expires worthless and then once again we have financed a portion of the March 280 call with the hope that earnings will be a bullish catalysts. At Feb expiration, if the stock is 280 or lower we will have the same decision to make on how to roll or whether to let the March call stand for unlimited upside.