Broadcom Iron Condor Could Produce 29% In 4 Weeks

Broadcom (AVGO) is sitting right between the 50 and 200-day moving averages, and that could mean it’s a good time for an iron condor trade.

Broadcom is also showing elevated implied volatility with an IV Percentile of 82%.

An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

AVGO IRON CONDOR

Traders that think AVGO stock might stay in the current range over the next four weeks could look at an iron condor.

As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

First, we take the bull put spread. Using the October 18 expiry, we could sell the $130 put and buy the $125 put. That spread could be sold yesterday for around $0.65.

Then the bear call spread, which could be placed by selling the $170 call and buying the $175 call. This spread could also be sold yesterday for around $0.50.

In total, the iron condor will generate around $1.15 per contract or $115 of premium.

The profit zone ranges between $128.85 and $171.15. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.15 x 100 = $385.

Therefore, if we take the premium ($115) divided by the maximum risk ($385), this iron condor trade has the potential to return 29%.

If price action stabilizes, then iron condors will work well. However, if AVGO stock makes a bigger than expected move, the trade will suffer losses.

COMPANY DETAILS

The Barchart Technical Opinion rating is a 32% Buy with a Weakest short term outlook on maintaining the current direction.

AVGO rates as a Strong Buy according to 29 analysts with 3 Hold ratings.

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 an iron condor is based on the premium received. In this case, we received $115, so we could set a stop loss equal to the premium received, or a loss of around $115.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $135 on the downside and $165 on the upside.

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.