The S&P 500 is in correction mode with the recommended stock market exposure sitting at the lowest level, 0%-20%. One way for investors to reduce exposure is to selectively add some bearish option trades to their portfolios. Broadcom stock is one possibility.
Broadcom on Wednesday broke below its 200-day moving average. Its 50-day moving average is starting to dip toward the 200-day, with the threat of a "death cross" on the horizon if they converge. If Broadcom continues to move lower, a bear put spread would be the best way to trade it.
A bear put spread is a debit spread. That means investors need to pay the premium in order to open the trade. On Broadcom, a bear put spread could be set up using the 175 strike as the long put. The 170 strike then becomes the short put for the May 16 expiration.
This trade would cost around $195 per contract with a maximum potential gain of $305.
Broadcom Stock: Maximum Profit With A Further Drop
To achieve the maximum profit, this trade would need Broadcom stock to drop a further 5% between now and expiration on May 16. The break-even point for the bear put spread is 173.05, which is calculated as 175 less the $1.95 option premium per contract.
If Broadcom stock drops early in the trade, it may be possible to make a profit at slightly higher prices. At expiration, if Broadcom stock is trading above 175, the entire spread would expire worthless. The trade would lose 100% or $195.
Investors can set a stop loss at 50% of the premium paid. In this case, that would be a loss of around $100. As this is a bearish position, traders who think Broadcom stock could move higher from here should not enter this trade.
The trade starts with a delta of -7. Further, that means the exposure is roughly equivalent to being short 7 shares of Broadcom stock.
No. 2 Ranking In Its Group
Despite its bearish outlook, Broadcom stock ranks second in Investor's Business Daily's fabless semiconductor group, according to IBD Stock Checkup. It has a Composite Rating of 87, an Earnings Per Share Rating of 98 and a Relative Strength Rating of 56.
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.
