Broadcom (AVGO) stock was a bearish candidate that came up on one of my Barchart Stock Screeners having broken below the 200-day moving average.
Here are the full parameters for the screener and the results.
Today, we’re going to look at a Bear Put spread trade that assumes AVGO will continue to move lower since breaking through the 200-day moving average.
A Bear Put spread is a bearish trade that also benefits from a rise in implied volatility.
The maximum risk for a Bear Put spread is limited to the premium paid while the maximum potential profit is also capped.
The maximum profit is equal to the width between the strikes less the premium paid.
AVGO BEAR CALL SPREAD
To create a Bear Put spread, we buy an out-of-the-money put and then sell another put further out-of-the-money.
Buying the May 16 put with a strike price of $175 and selling the $170 call would create a Bear Put spread.
This spread was trading for around $1.95 yesterday. That means a trader buying this spread would pay $195 in option premium and would have a maximum profit of $305.
That represents a 156% return on risk between now and May 16 if AVGO stock falls below $170.
If AVGO stock closes above $175 on the expiration date the trade loses the full $195.
The breakeven point for the Bear Put spread is $173.05 which is calculated as $175 minus the $1.95 option premium per contract.
COMPANY DETAILS
The Barchart Technical Opinion rating is a 24% Sell with a Strengthening short term outlook on maintaining the current direction.
Broadcom is a premier designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor (CMOS) based devices and analog III-V based products.
Headquartered in San Jose, CA, Broadcom's semiconductor solutions are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays.
Broadcom's infrastructure software solutions enable customers to plan, develop, automate, manage, and secure applications across mainframe, distributed, mobile, and cloud platforms.
The company's Symantec cyber security solutions portfolio, include endpoint, network, information and identity security solutions.
Conclusion And Risk Management
One way to set a stop loss for a Bear Put spread is based on the premium paid. In this case, we paid $195, so we could set a stop loss equal to the 50% of the premium paid, or a loss of around $95.
Another stop loss level could be if the stock broke above $195.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
