Broadcom Inc. (AVGO) is set to undergo a 10-for-1 stock split on July 15. With strong free cash flow and price targets, AVGO stock appears undervalued. One way to capitalize on this is by selling out-of-the-money short put options to generate extra income. This strategy was discussed in a previous Barchart article from June 14, where a profitable short put option trade was highlighted.
Following the stock split, shorting put options will become more accessible as the capital required will decrease significantly. For example, a put option with a strike price of $1,670 showed a bid-side premium of $38.80, offering a return of 2.32%. After the split, the strike price for this trade will be $167.00, reducing the capital needed to participate in the trade.
Investors who engage in short selling AVGO put options stand to benefit from good returns while also potentially acquiring shares at a discounted price. Considering the company’s strong free cash flow and future projections, AVGO shares are deemed undervalued. Analysts estimate significant FCF margins for AVGO, which could lead to a target valuation of over $2,000 per share post-split.
By shorting out-of-the-money put options, investors can earn additional income and establish a favorable purchase target price for AVGO shares. This strategy presents an opportunity to profit from AVGO’s potential upside while minimizing risks associated with stock ownership. It is a prudent approach to leverage the stock split and AVGO’s undervaluation to generate returns in the options market.
Mark R. Hake, a Certified Financial Analyst at Barchart, does not hold any positions in the securities discussed in the article. The content is for informational purposes only and should not be construed as investment advice. Investors are encouraged to review Barchart’s Disclosure Policy for further information. The opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
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