Analysts have been raising their price targets on chip maker Broadcom Inc. (AVGO) since it released its fiscal Q3 results on Sept. 2. Two attractive plays are to sell cash-secured out-of-the-money AVGO puts as well as put credit spreads. This article will discuss both plays.
AVGO is at $352.85 as of late Friday, Sept. 25, slightly lower than right after its earnings results ($357.16 on Sept. 3). But AVGO is still well below its Aug. 7 peak of $476.66.
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AVGO stock - last 3 months - Barchart - Sept 25 Higher Forecasts and Price Targets
I wrote about its strong results in my Sept. 4 Barchart article, “Is AVGO Stock Poised for a Rebound After Broadcom's Strong Q3 Results?”
Based on its strong free cash flow (FCF) margins (44.2% in the past year) and analysts' revenue projections ($173.15 billion for the year ending Oct. 2027), FCF could reach $76.5 billion.
However, since then, analysts have raised their revenue forecasts to an average of $173.5 billion. That raises the FCF forecast to $76.68 billion.
As a result, using a 2.75% FCF yield metric, Broadcom could be worth $2.788 trillion ($76.68b/0.0275), or over $1.1 trillion above its current market cap of $1.68 trillion.
In other words, the price target (PT) is 66% higher (i.e., ($2,788b/$1,680b)- 1), or $352.85 x 1.66 = $585.73 per share. That's higher than my prior $582 PT in the Sept. 4 Barchart article.
Wall Street analysts have been raising their price targets as well. For example, Yahoo! Finance reports the average of 50 analysts is $531.85. That's higher than the prior PT of $525.97.
Similarly, Barchart's mean survey PT is now $523.58, up from $517.31, and AnaChart's survey PT is $504.28, up from $497.25.
The bottom line is that analysts see revenue, FCF, and the underlying value of Broadcom continuing to rise. That should eventually push AVGO stock higher.
So, why is it still trading water? One way to play AVGO, if it keeps doing this, is to sell short cash-secured out-of-the-money (OTM) puts.
Shorting AVGO Puts
I discussed this play in the Sept. 4, Barchart article mentioned above, and it has worked out well in the last three weeks. It's time to roll this play over to a new month.
For example, I analyzed shorting the $330.00 strike price put option expiring Oct. 9, which was 36 days to expiry. At the time, AVGO was at $357.16, so this strike was 7.6% lower (i.e., “out-of-the-money” or OTM). The investor would have received $533 immediately (i.e., a $5.33 premium) after posting cash or buying power of $33,000.
That worked out to an expected one-month yield of 1.615% ($533/$33,000). Today, that premium has drifted down to just $1.81 at the midpoint, giving the investor a $352 profit on the $33K invested as collateral, or 1.066%.
However, after rolling that over (i.e., entering an order to “Buy to Close” that put contract), the investor can use the same collateral to short a new put at the end of October. For example, the Oct. 30 expiry $330.00 put strike price has a midpoint premium of $595.
This means an investor can make a net yield of $595/$33,000 or 1.803% over the next month.
AVGO puts expiring Oct. 30 - Barchart - As of Sept. 25, 2026 After adding that to the prior $352 already made, that means the investor would have accumulated $947 with the same collateral over the past 2 months, or 2.87%. That works out to an annualized expected return (ER) of 17.2% (assuming the same yield can be achieved every two months).
Moreover, the accumulated income lowers the eventual buy-in price, if AVGO drops to $330.00. For example, after subtracting the $947 received, the net cost for 100 shares would be $33,000 - $947, or $32,053, i.e., $320.05 per share.
That is 9.1% lower than its price late on Friday, Sept. 25. Moreover, given the upside (i.e., price targets between $531 and $586, the expected return is over 75%. The bottom line is that this is an attractive way to play AVGO over the next year.
Put Credit Spread for Lower Collateral Plays
Some investors don't have or want to risk $33,000 in a short-put play. One way to do this is to do a put credit spread. This is a higher return, lower collateral requirement play, although it has higher risk.
The investor shorts the $330.00 put, but also simultaneously buys a $325.00 put. In this case (see the table above), the net credit collected is $5.95-$4.70 = $1.25, or $125 per put contract on each leg.
Since the put purchase protects any downside risk, if AVGO were to drop below $325.00, the brokerage firm only requires collateral of $500 (i.e., ($330-$325) x 100). As a result, the expected ROI is very high:
$125 / $500 = 25% over 1 month
However, if AVGO drops below $330, the account will be assigned to buy 100 shares. But, given the net income of $125.00 already received (i.e., $1.25 per put contract), the breakeven point is $330-$1.25 = $328.75.
The risk is then that AVGO falls between $328.75 and $325.00, i.e., $3.75 x 100 = $375.00. The investor stands to lose that amount, as it is unhedged. Nevertheless, this is a very high expected return situation:
$125 / $375.00 at risk = 33.33% ER
So, for example, if the investor is willing to invest $2,000 (rather than $33K with a short put), they can short 4 puts at $330, and buy 4 puts at $325.
The net credit collected will be $500, but the net at risk will be $2,000 - $500, or $1,500, with an expected return of $500/$1400 = 33.33%. Just remember, though, that if AVGO drops between $328.75 and $325.00, the investor stands to lose 100% of the $1,500 at risk.
However, this allows investors willing to take on more risk, in return for lower collateral and higher returns, to play the expected upside in AVGO every month.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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