Tony Zhang's Broadcom Options Trade, Ahead Of Earnings

Tony Zhang suggested on CNBC's "Options Action" traders should consider a bullish options trade in Broadcom Inc AVGO, going into earnings.

The company is scheduled to report earnings on Thursday. Zhang thinks it is going to report pretty solid earnings.

Broadcom has a very solid business and the management is expecting to generate about $11 billion of free cash flow, said Zhang. He thinks the semiconductor sector is a bit extended, but he is not worried because Broadcom has underperformed the semiconductor sector recently. The company is expanding to higher-margin software businesses, explained Zhang. He also thinks the stock is trading at a reasonable P/E multiple of 18.

The options market is implying a move of 5.8% in either direction for earnings, while the stock has moved 4.2% over the last eight quarters. Zhang thinks implied volatility in Broadcom is a bit elevated so he wants to sell the January $410/$390 put spread for a total credit of $9. The spread is $20 wide so Zhang's maximal loss is $11.