Per Bloomberg:

President Donald Trump has decided to withdraw from the landmark Iran nuclear accord, according to a U.S. official, a move that would plunge the Mideast into a new era of uncertainty.

The markets do not seem to care about the Iran news as the broad markets are mixed in mid-day trade.

Let’s look at Broadcom Ltd. today (ticker:  AVGO):

The VantagePoint platform recently indicated a potential upside breakout in AVGO could be forming due to a bullish crossover between 5/4/18 and 5/7/18.

Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out three significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing above the black simple moving average between 5/4/18 and 5/7/18. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position that same day.  This indicator measures strength and weakness for a 48-hour period, in this case strength.  The move to the GREEN position further makes the case for a potential bullish scenario. Additionally, we see that the predicted high and low for today’s range is above the actual high and low from yesterday’s session.  I want to play the VP bullish indication.

Strategy Discussion

If one were a straight stock trader, simply buying AVGO in the $235.00 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter AVGO without the limitation of time associated with other strategies. In this scenario, it would also be good practice to place a sell-stop order in the $228.00 area to mitigate potential losses.

For more active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit call spread may be one way to approach this situation.  First order of business is to determine your target strike.  To do this you will need three pieces of information:  current price, option expiration date and at the money implied volatility for that expiration.  In this case, the calculation yields a target price of approximately $246.  One may consider the AVGO May 18th Regular Expiration 242.5/245 call spread, paying $0.65.  You max risk is the amount of premium you pay, the max reward is the width of the spread less any premium paid.  In this case max risk is $0.65, max reward is $2.50 – $0.65 = $1.85.  This gives us a reward to risk ratio of 2.85:1!

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.

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Mike Shorr
Mike Shorr
Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProperTradingAcademy.