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 (NASDAQ: 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.