Mike Khouw goes through a number of ways to play Broadcom before earnings.
In a cautionary tale about exceeding one's limits , in Greek mythology, Icarus, son of Daedalus, perished after flying too close to the sun, melting the wax that held the feathers on the wings his father had made him.
Of course the authors of the story would not have known that in real life the temperature hazards Icarus would have faced are sub-freezing temperatures, not heat as the air is considerably colder at altitude; minus 40 to minus 70 degrees Fahrenheit at the cruising altitude of a commercial jet let alone the harsh realities of outer space. Regardless, what they understood is that one cannot fly to the sun with man made wings. Broadcom has also been soaring to new heights, reaching a fresh all-time high Tuesday — two days before the company's quarterly earnings release — after announcing that they have started shipping a "breakthrough" new version of the company's data center switch chips which is apparently as powerful as six of its predecessor chips and costs twice as much, $20,000 each. AVGO 5Y mountain Broadcom, 5 years Nvidia tends to get most of the attention when it comes to AI, as their industry leading GPUs do much of the heavy lifting, but the networks must communicate with those chips, and if they don't do so efficiently, the GPUs are under-utilized, typically only 30-40%. Broadcom's technology means to improve this. It's not just the stock price that is rising, or Broadcom's customers' utilization rates. So is Broadcom's forward multiple, 39x forward earnings estimates, just shy of its all-time highs. Sell-side analysts are overwhelmingly positive on Broadcom, with 46 buys, 4 holds and 1 sell , and why wouldn't they be? Nvidia posted good numbers, Broadcom has technology that helps customers better utilize Nvidia GPUs and Meta's announcement Tuesday that they entered into a 20-year contract with Constellation Energy to buy nuclear power starting in 2027 to run AI proves the runway on big AI capex may be long indeed. The trade Still the stock is up well over 75% since the lows of the first week of April. If you own the stock and want to hedge, consider a put spread collar such as the July 11th 225/250/300 to mitigate some of the downside risk. Buy AVGO July 11 $250 put Sell AVGO July 11 $225 put Sell AVGO July 11 $300 call If you don't own the stock, but are planning to buy it ahead of earnings, a call spread risk reversal will have characteristics similar to that of stock with a put spread collar. One may also consider extending the tenor of the long leg turning the trade into a calendar spread as well, such as this example: Buy AVGO Sept. 19 $260 call Sell AVGO July 18 $220 put Sell AVGO July 18 $310 call DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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