Broadcom Call Volume Leans Bullish, But Open Interest Tells Different Story; Sell-the-News Setup Brewing?

Options market signals

Data from options market shows $Broadcom (AVGO.US)$ options trading volume yesterday summed up at 247.32k, a relatively low level compared to volumes on previous earnings days. This reflects the market's "risk-off" session continuation amid the war situation in Iran, though we saw the market reverse early session losses at the close.

Figure 1: Volume and open interest for contracts expiring Mar 6, 26

Call volume expiring this Friday outnumbered put volume roughly 1.52x and stretched out to out-of-the-money strikes, showing bullish sentiment. Open interest seems to have something else to say. Most of the call contracts outstanding expiring this Friday are at the 310 strike. If we check the large trades done at this strike, all the 310 strike calls were being sold when Broadcom was trading at $315.71 and $316.36, and the contracts are still open. Usually traders sell in-the-money calls for a bearish outlook or to lock in profits.

Figure 2: Large trades on 310 strike expiring Mar 6, 26

The second highest outstanding call interest is at the $350 strike and again data shows the large trades were done on the sell side but out-of-the-money when the stock was trading around $335 that day.

Figure 3: Large trades on 350 strike expiring Mar 6, 26

Two questions to think about before any strategy is executed on the earnings:

Will the Iran/US war end shortly?

At the time of writing (MAR 3 03:24 ET), index futures reversed yesterday's recovery again, trending down more than 1% for the three major indexes. Different directions on gold and silver show who's the true safe haven asset during wartime. And yields finally agree with the stronger dollar heading to near 90bps increase across the tenors. Both WTI and Brent prices stay at an elevated level. The message is clear: money is parking in safe haven assets and started piling into treasuries. The continued uncertainty in geopolitical tensions is not supportive for the equity market.

Figure 4: major indexes futures, commodities, bonds price.

Where were we before the war?

Think about what was left to us last week: a hotter PPI (+0.5% vs. +0.3% expected), credit spreads widening on software spillover, discussion on AI disruptor?/collaborator?, tariff baseline aiming for 15%. It's not like we were celebrating a good economy and new highs and all of a sudden the war ruins everything.

The market sets a 'reasonable' target for Broadcom: consensus revenue $19.17 billion, slightly above the previous guidance of $19.1 billion, 67.3% gross margin, and $7.05 billion net income, but for Broadcom to have a surprising price movement, it has to absolutely beat every single metric. No slight decline in margins, no weakness in software/semiconductor business, no weak guidance. Otherwise, we saw what happened to Nvidia.

Strategy for premiums in case of "sell the news"

Based on the current IV of the nearest options contracts, the expected move for the earnings is 8.22%. If the market is still in "risk-off" mode, any earnings beats will likely be downplayed and the space for price to move up is limited. Therefore, if the forecast is for neutral, or range-bound, price action, selling a strangle with near-neutral delta, while capturing the premium.

Figure 5: Profit/loss of short strangle *price for illustration only

You simultaneously sell an out-of-the-money call and an out-of-the-money put on the same underlying asset with the same expiration date, collecting premium upfront. Maximum profit = total premium (credit) received and can be achieved if both options expire worthless. Maximum loss is unlimited and this is very important, as in the following chart we see the actual price movements (orange line) on those earnings days have greater possibility to break the market expected moves (blue line). So this strategy has to be played with extra caution.

Figure 6: volatility charts of Broadcom

To cap the unlimited loss risk, one can add two extra legs by buying a put and call to make a short iron condor (essentially a bull put spread + a bear call spread). The maximum loss will equal:

The difference between the strike prices of the bull put spread (or bear call spread) − the net credit received

Figure 7: Profit/loss of short iron condor *price for illustration only

In general, the strategy for this week should focus on risk management, and reduce delta exposure on a portfolio level. Play safe.

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