High Broadcom premiums draw call sale

By David Russell,

Shutterstock photo

One trader is taking advantage of the high prices in Broadcom options.

Our tracking systems detected the sale of 13,250 January 37 calls for $2.21 yesterday against open interest of just 48 contracts. The trade accounted for more than half the volume in the broadband-chip maker.

Implied volatility in the stock is 38 percent, compared with its 33 percent historical volatility. This means that Broadcom's options are pricing in a bigger propensity to move than the stock normally demonstrates, so the investor sold calls to earn premium.

He or she probably owns the shares and is using the calls to manage their position. The investor is now obligated to sell the stock if it goes back to $37, a level where it hit resistance earlier in the month before dropping along with the rest of the market.

BRCM fell 0.65 percent to $32.07 yesterday and is down more than 15 percent since the start of April. Its last two earnings reports have been strong, but management has said that higher costs will squeeze profit margins.

The stock has been trapped in a range since last spring, so yesterday's trader is probably selling the calls to make some money while waiting for the stock to pop. (See our Education section for more time-decay strategies.)

Overall option volume was quadruple the daily average.

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

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: BRCM

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