Broadcom stock's options priced for a move of more than $110 after earnings

By Tomi Kilgore

Broadcom's options 'straddle' is priced for a stock move more double any of its one-day post-earnings moves in the past three years

The options market has priced in a much bigger-than-usual move for Broadcom Inc.'s stock on Friday, in the wake of the semiconductor and software company's fiscal first-quarter results.

Broadcom (AVGO) is scheduled to report its results after Thursday's closing bell. It has beaten expectations for earnings per share for 14 straight quarters and beat revenue estimates for 15 straight quarters.

An options strategy known as a "straddle" is priced for the stock to move $114.60, in either direction, on the day after the results, according to data provided by Matt Amberson, principal at Option Research & Technology Services (ORATS).

That is more than double Broadcom's average one-day post-earnings move over the past 12 quarters of $45.31.

The stock was up 3.1% at $1,392.10 in early-afternoon trading on Thursday, just below its record close of $1,399.17 on March 1.

Based on current prices, buyers of the straddle would start making money if Broadcom's stock rises above $1,506.70 or falls below $1,277.5 on Friday.

In the day after the company's past 12 quarterly reports, the stock has gained 11 times and lost once, according to FactSet data.

Read: Broadcom stock rises to a record after $4 billion deal to sell its EUC Division.

Also read: Tesla's stock dive means the EV maker is now worth less than Broadcom.

Keep in mind that straddles don't try to predict post-earnings moves; a straddle is a pure volatility play, meaning it's all about the absolute value of the move, not the direction. It involves the simultaneous buying (or selling) of bullish (calls) and bearish (puts) options, with strike prices at current, or "at-the-money" prices.

Straddles are priced using historical and current implied volatilities of the stock, which help provide the potential distance a stock could travel between now and when the option expires. They are priced to entice investors to buy them, but just outside the likely realm of possibilities; while the house doesn't always win, it usually does the overwhelming majority of the time.

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Still, there's hope for buyers of Broadcom straddles, as there has been a much higher-than-average beat rate for buyers in the latest earnings season.

ORATS' Amberson noted that the average post-earnings stock move over the past 12 quarters has been about 98% of what straddles have priced.

For this latest earnings season, however, that average move has been more than 100% of straddle pricing.

-Tomi Kilgore

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03-07-24 1358ET

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