1 High-Probability Iron Condor Trade on Broadcom Stock to Make Now with 29% Return Potential

Broadcom (AVGO) is currently a compelling candidate for an iron condor strategy with the stock being stuck in between the 50 and 200-day moving averages.

Broadcom stock is also showing high implied volatility at 47.21% compared to a twelve-month low of 34.96%.

This allows traders to collect more premium, increasing the potential return and providing a wider margin for error on both sides of the trade. 

The company’s strong liquidity ensures tight bid-ask spreads, making it easier to enter and adjust positions.

With no immediate earnings catalysts, the likelihood of a sharp move in either direction is reduced, further supporting the use of this strategy.

AVGO Iron Condor

An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Traders that think AVGO stock might stay in the current range over the next few weeks could look at an iron condor.

As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

First, we take the bull put spread. Using the August 21 expiry, we could sell the $310 put and buy the $290 put and then the bear call spread, which could be placed by selling the $430 call and buying the $450 call. 

In total, the iron condor will generate around $4.45 per contract or $445 of premium.

The profit zone ranges between $305.55 and $434.45. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $20 wide, the maximum risk in the trade is 20 – 4.45 x 100 = $1,555.

Therefore, if we take the premium ($445) divided by the maximum risk ($1,555), this iron condor trade has the potential to return 28.62%.

If price action stabilizes, then iron condors will work well. However, if AVGO stock makes a bigger than expected move, the trade will suffer losses.

The expected move for Broadcom stock over the next 51 days is between 325.14 and 413.54, which is less than the profit range of this Condor.

Not that earnings are scheduled for early September, so this trade should not have any earnings risk if held to expiration.

Company Details

The Barchart Technical Opinion rating is a 24% Buy with a Weakest short term outlook on maintaining the current direction.

AVGO rates as a Strong Buy according to 34 analysts with 3 Moderate Buy ratings and 5 Hold ratings.

Broadcom is a premier designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor (CMOS) based devices and analog III-V based products. 

Headquartered in San Jose, CA, Broadcom's semiconductor solutions are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. 

Broadcom's infrastructure software solutions enable customers to plan, develop, automate, manage, and secure applications across mainframe, distributed, mobile, and cloud platforms. The company's Symantec cyber security solutions portfolio, include endpoint, network, information and identity security solutions.

Conclusion And Risk Management

One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $445, so we could set a stop loss equal to the premium received, or a loss of around $445.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $330 on the downside and $410 on the upside.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.