Broadcom stock continues to show impressive strength as the artificial intelligence boom rolls on. Traders looking for a more conservative way to play Broadcom via options could use a bull put spread.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Broadcom stock trades sideways or higher and even sometimes if it trades slightly lower, offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle.
In exchange for selling the bull put spread, the trader receives the option premium. Further, that has risk equal to the difference in strike prices, less the premium received.
Setting Up The Bull Put Spread Trade
Traders who think Broadcom will stay above 270 for the next few weeks could sell a Sept. 19 bull put spread running from 260 to 270 for around $1.90 a share. Note that the 50-day moving average is currently trading around 270 and could potentially provide support on a pullback.
Selling this spread would generate roughly $190 in premium on a 100-share contract with a maximum risk of $810. If the spread expires worthless that would be a 23.5% return in just over one month, provided Broadcom stock is above 270 at expiration.
The maximum loss would occur if Broadcom stock closes below 260 on Sept. 19, which would see the premium seller lose $810 on the trade. Also, the break-even point for the trade is 268.10. That is calculated as 270 less the $1.90 option premium per contract.
That's 11.7% below Thursday's closing price.
It's best to set a stop loss if the stock breaks back below 270, or if the spread increases in value from $1.90 to $3.80. Sticking to this stop-loss level will help avoid large losses if the stock drops back down.
Meanwhile, for investors seeking income generation with defined-risk parameters, this Broadcom bull put spread presents an appealing opportunity in the current market environment.
Broadcom Stock: First In Its Group
According to IBD Stock Checkup, Broadcom stock ranks first in its group. Further, Investor's Business Daily gives it best-possible scores of 99 for its Composite Rating and Earnings Per Share Rating. Its Relative Strength Rating currently stands at 95.
Also, Broadcom stock is featured on IBD's Big Cap 20, Leaderboard, and Tech Leaders lists.
The company is a leading global supplier of semiconductor and infrastructure software solutions. Its products support enterprise networking, data centers, telecom, smartphones, industrial automation and more. Broadcom also offers cybersecurity solutions through its Symantec portfolio, covering endpoint, network and identity security.
Broadcom unveiled its new Jericho 4 Ethernet fabric router, designed to support large-scale AI infrastructure by interconnecting more than 1 million processors across multiple data centers.
The chip enhances bandwidth, security and performance, addressing the limitations of single data-center setups for complex AI workloads. It also complements Broadcom's existing networking products like the Tomahawk 6 and Tomahawk Ultra.
It's important to remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster is founder and operator of Options Trading IQ, a website offering instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ.
