Exploring Alternative Strategies with Broadcom’s Put Options

Investors eyeing Broadcom Inc (Symbol: AVGO) might find selling put options an attractive alternative to purchasing shares at the current market price of $188.90. A specific strategy to consider is the December 2027 put with an $85 strike price, currently priced at a bid of $6.95. Selling this put allows investors to earn an 8.2% return against the committed $85, translating to an annualized rate of 3.1%.

While this strategy offers potential income, it comes with caveats. The put seller does not gain from Broadcom’s upside unless the stock price falls significantly, resulting in an exercised contract. The counterparty benefits from exercising this option only if it is financially advantageous compared to selling at the market price. If Broadcom’s shares were to plummet by 54.9%, exercising the contract would result in a cost basis of $78.05 per share (after deducting the $6.95 premium from $85). So, the only real profit for the put seller is from the premium, yielding a 3.1% annualized return.

Notably, this annualized rate exceeds Broadcom’s dividend yield of 1.2% by 1.9%, based on its current stock price. However, purchasing shares directly to capture dividends involves greater risk, as the stock would need to drop 54.93% to hit the $85 strike price.

It’s essential to keep in mind that dividends are variable and fluctuate with a company’s profitability. Analyzing Broadcom’s dividend history can provide insights into the likelihood of maintaining the current yield of 1.2%.

The following chart shows the trailing twelve-month trading history for Broadcom, marking the $85 strike location in green:

Combining the above chart with the historical volatility of Broadcom can assist investors in assessing whether the December 2027 put option at an $85 strike for an annualized return of 3.1% is worth the associated risks. The trailing twelve-month volatility has been calculated at 62% based on the last 250 trading days, alongside today’s price of $188.90.

In midday trading on Wednesday, the put volume among S&P 500 components reached 1.30 million contracts, with call volume at 1.53 million, resulting in a put:call ratio of 0.85. This figure indicates a higher-than-normal level of put buying compared to a long-term median ratio of 0.65.

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.