Amid a recent boost in chip stocks, especially those that excel in the field of artificial intelligence, let's look at a long-term bullish options trade in Broadcom stock.
Traders await with anticipation Broadcom's earnings release on June 5. The chart is quite bullish. Broadcom stock recently traded less than 13 points, or around 5%, from its all-time high of 251.88.
Pullbacks seem to be presenting as buying opportunities.
The stock's near-term price support at 215 seems like the level to hold for more upside. This trade is suggested to implement after the earnings release, not before, in order to minimize potential downside risk with a poor response to earnings. That being said, since this is a longer-term hold over the noisy bits the stock market today might show, the trader can enter in this trade at any time. Just consider your risk.
Broadcom Stock: The Leap Covered Call
In a leap covered call, the term leap refers to an option position that is well into the future, customarily one year or more.
Selling the call option well into the future allows the trader to hold the stock at a discount. And if Broadcom stock continues to rise, the call option can be covered. Then, the trader can open a new option against the stock to continue to own shares while collecting revenue as time moves forward. Hopefully, the stock continues to climb.
Buy 100 shares of Broadcom stock, then sell to open one Broadcom 250-strike call that expires on June 18, 2026. It recently priced at $44.20. After earnings, the stock may of course move to a completely different price. The goal here: buy the stock at the open after earnings release and then sell the call strike just outside of the money.
A 100-share position would allocate $24,180 of an investor's capital to Broadcom stock, based on recent trading. Selling of the long-dated 250 call would deliver a credit of around $4,420. To get the breakeven price of the stock at expiration, subtract the credit received against the cost of the stock, $24,180 – $4,420 =$19,760 less commissions. This implies a reduction in the actual cost of each share to 197.60.
Now, let's identify key chart levels in Broadcom stock. While the relative resistance zone sits right around 255, support sits near 195 as well as near-term support at 215. Broadcom stock shows an excellent Relative Strength Rating of 95. And IBD Stock Checkup shows it as leader of its group.
Exit Strategies
Possible ways to leave the trade include holding the stock and the option until expiration in June 2026. If Broadcom stock holds above 250, the trader will have to relinquish shares at that price.
He or she collects the difference between the actual cost of shares and the $250 strike price. We get $52.32, or $5,232 per contract, or a solid 26% return.
Two, think about setting an alert for 197.60, the breakeven price. Sell the entire position at the sign of breaches in risk thresholds. Finally, the bullish trader might say, "Shouldn't I sell the call much further out of the money if I am bullish on the stock?"
The answer is yes. However, as a market participant, I am much more inclined to consider where my risk is positioned for the greatest possible advance. So I stay conservative in my approach.
Anne-Marie Baiynd is a 25-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." You can find her on X at @AnneMarieTrades and on the IBD platform
