Long Delta in AVGO | Option Trades Today

AVGO & MSFT Options Trading Strategy – Early Year Analysis

Key Concepts:

• IV Rank (Implied Volatility Rank): A measure of a stock’s implied volatility relative to its historical range. Lower ranks suggest lower volatility.
• Implied Volatility (IV): The market’s expectation of future price fluctuations of a stock, derived from option prices.
• Delta: A measure of an option’s sensitivity to changes in the underlying asset’s price.
• Put Ratio Spread (One-by-Two): An options strategy involving buying one put option and selling two put options at different strike prices, aiming for a limited-risk, limited-reward profile.
• Earnings Cycle: The period surrounding a company’s earnings announcement, often characterized by increased volatility.
• Synthetic Selling: Creating a position that mimics the payoff of selling an option without directly selling it.
• Break-Even Point: The price at which a trade becomes profitable.
• TastyTrade: A brokerage platform specializing in options trading.

Market Overview & AVGO Focus

The speaker begins by noting a tight trading range in the overall market, with the S&P down only $3, and contracting volatility. However, the primary focus is on AVGO (Broadcom Inc.), a stock the speaker consistently trades at the beginning of the year. Despite AVGO’s IV Rank being relatively low at 16, and a moderate market position at $330, the speaker outlines a specific strategy based on its earnings calendar.

Avoiding the Earnings Cycle – AVGO’s Advantage

A core argument is the avoidance of the earnings cycle. Unlike many stocks, including Apple (AAPL) and Microsoft (MSFT), which have earnings announcements in January, AVGO’s earnings are scheduled for March 12th. The speaker actively avoids trading stocks during their earnings cycle due to increased volatility and unpredictable price movements. This is supported by the observation that March implied volatility (51) is higher than February volatility (around 45), reflecting the market’s anticipation of the earnings announcement.

AVGO’s Market Correlation & Trade Setup

While AVGO doesn’t have a strong correlation to the overall market (described as “pretty random”), it had been tracking the market’s downward trend until December, falling from around $400 to $332. On the day of the trade, AVGO was down $10.70 (a 3% move), exceeding its expected daily move of approximately $6.

The speaker’s preferred strategy for AVGO is a one-by-two put ratio spread, chosen over simply selling a naked put due to risk management preferences. This spread involves buying one put option with a strike price of $90 and selling two put options with a strike price of $80. The initial trade was executed at a $1.99 credit when the stock price was approximately $231.87, filled about two cents off mid-price. The current fill price is estimated around $1.93-$1.92.

Put Ratio Spread Mechanics & Profit Potential

The one-by-two put ratio spread results in a net long delta of approximately seven, with a 91% probability of profit (POP). The speaker describes this as “synthetically selling the $270 puts” for a $1.99 credit. The maximum profit potential is $10 (the difference between the strike prices of $290 and $280) plus the initial credit received ($1.99).

A specific scenario is highlighted: if the stock price remains at $280 at expiration, the sold $280 puts would expire worthless, while the purchased $90 put would be worth $10, resulting in a total profit of $11.99. The break-even point is significantly below the current stock price, at approximately $270, well outside the standard deviation.

MSFT Trade Example & Directional Shift

The speaker briefly references a successful Microsoft (MSFT) trade from the previous week (Tuesday), closed the following day for a $10 profit, and initiated a new MSFT trade for $10.33. This trade was described as a “directional trade” – a bullish bet – and benefited from a roughly 10-11% move in the stock price. Importantly, the IV Rank of MSFT did not change during this period, indicating a shift from a volatility-based trade to a directional one. The speaker hopes a similar dynamic will occur with the AVGO trade.

Call to Action & TastyTrade Promotion

The speaker concludes with a call to action, encouraging viewers to open and transfer accounts to TastyTrade, highlighting a promotional offer of a 4% match on account transfers, up to $10,000 (potentially creating a $250,000 account). He directs viewers to the TastyTrade platform for details on the promotion and to view the specific AVGO trade executed on the platform (“the bats”).

Synthesis/Conclusion:

The core takeaway is a specific, earnings-avoidance-focused options trading strategy centered around AVGO. The speaker leverages the stock’s later earnings date to implement a one-by-two put ratio spread, aiming for a limited-risk, limited-reward trade with a favorable risk/reward profile. The strategy is underpinned by a detailed understanding of implied volatility, delta, and the mechanics of put ratio spreads, and is presented with specific trade details and real-world examples. The successful MSFT trade serves as an illustration of how a trade can transition from volatility-based to directional, offering further potential for profit. The overall message emphasizes a disciplined, analytical approach to options trading, combined with a strategic focus on avoiding potentially disruptive events like earnings announcements.