Broadcom stock is set to report earnings on Thursday after the closing bell and the options market is pricing in a 6.5% move in either direction. The implied volatility of this week's options chain is sitting around 94%, while Broadcom normally trades with implied volatility around 45%.
Let's look at selling a cash-secured put to take advantage of this high implied volatility around the earnings announcement.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.
The put is very similar to a covered call and quite easy to understand once you know the basics.
It's also important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
How The Cash-Secured Put Works
For Broadcom stock, a trader selling the Sept. 5 put with a strike price of 285 will generate around $330 in premium per contract. The put has a delta of 21, which means there is an estimated 79% chance that it will expire worthless.
The put seller would have the obligation to purchase 100 shares of Broadcom stock at 285 if called upon to do so by the put buyer.
Calculate the break-even price for the trade by taking the strike price, less the premium received. In this case that gives a break-even price of 281.70. That's 6.8% below the price it was trading at, 302.40, as of this writing.
If the stock stays above 285 at expiry, the put option expires worthless, leaving the trader with a 1.2% return on capital at risk in less than one week. That works out to an incredible 143% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. But the loss gets partially offset by the premium received for selling the put.
Getting A Discount On Broadcom Stock
Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own. With this example, the trader either generates a 1.2% return in a few days, or they get to purchase Broadcom stock at a reasonable discount on the current price.
If Broadcom stock trades below 285 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to IBD Stock Checkup, Broadcom stock ranks first in its group. Investor's Business Daily gives it a best-possible score of 99 on both its Composite Rating and Earnings Per Share Rating. Its Relative Strength Rating is 94.
It's important to 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.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
