AVGO Stock: Up and to the Right

One famous acronym that applies to trading, charting, and probably life in general is “KISS.” It stands for “keep it simple stupid,” a principle first coined by the U.S. Navy in the 1960s. The principle states that systems work most effectively if they are kept simple and avoid unnecessary complications. The Broadcom Ltd (NASDAQ:AVGO) stock chart is one with that philosophy; it is simply moving from the lower left to the upper right.

This acronym has merit in trading too. The simplest strategies, where risk and return is defined, are easiest to execute and manage. If we are confident in our trading bias, option contracts are a great way at reducing risk, yet capturing return.

The following chart shows the simplicity involved in the AVGO stock chart.

Chart courtesy of www.StockCharts.com

The chart of AVGO stock is easy to discern and is straightforward. The impulse waves, highlighted in green, show the trend as it advances. The consolidation waves, highlighted in blue, show an area of congestion before the trend reasserts itself. The pattern looks like a staircase and is, by definition, an uptrend.

AVGO stock has just exited a consolidation wave and a new impulse wave has begun. An upside is to be expected.

The following strategy outlines a possible option to capitalize on the trend identified in AVGO stock.

The Strategy

AVGO stock is currently trading at around $168.00 per share; that is a hefty price to pay for a single share. Losses can mount quickly if some unforeseen circumstance presents itself and shares proceed to fall off a cliff. If that is not a concern to you, then by all means purchase shares at the prevailing price.

I would rather use options. I would get similar exposure but my initial outlay would be much less.

For example:

The January 20, 2017 $170.00 calls are trading at $13.30. I could purchase this option and have the right to purchase shares of AVGO stock at expiry for $170.00. If shares of AVGO stock are trading above $170.00, I can exercise the option at $170.00 and sell the shares at the prevailing market price, pocketing the difference. At expiration, AVGO stock would need to be above $183.30 for this strategy to be a profitable one.

Another strategy is to employ a bull call spread; it is similar to the strategy I outlined, except the initial outlay is smaller and the upside potential is capped.

Let me explain.

A bull call spread involves simultaneously buying calls at one price and selling an equal amount of calls at a higher price that expire on the same day.

For example: buying the January 20, 2017 $170.00 call option for $13.30 and then selling the January 20, 2017 $200.00 call for $3.40. The net outlay using the bull call spread is $9.90. At expiration, AVGO stock would need to be above $179.90 for this strategy to be profitable, but the upside of this strategy is capped at $30.00 because we sold an option. This represents a potential return of 200% if AVGO stock is trading above $200.00 at option expiry.

So there you have it. You can spend $13.30 per share and have unlimited upside, or you can lower your cost to $9.90 and have limited upside. Either strategy is considerably less than paying $168.00 per share, and also defines your risk. If the options strategy goes against you, the maximum loss possible is the initial outlay.

The Bottom Line on AVGO Stock

Simple chart patterns like AVGO stock can give investors the confidence they need to apply the applicable trading strategies. Just because the position you’re looking at has a high single share price tag, it doesn’t mean there aren’t ways to capitalize on it. Options are an easy way to capture potential upside while minimizing your outlay and risk. Simple is always better, and when it comes to investment strategies, this is no different.

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