Broadcom (NASDAQ:BRCM) sold off very strongly on earnings last night and in through this morning. However Broadcom is now very cheap on a P/E basis, trading at only 14.69x 2011 forward earnings. We have numerous high profile defenders calling this point including Jim Cramer and Jon Najarian. We are down more than 7% here on the day after earnings.
I want to buy into a company that gets hit for no compelling reason. I believe that we will have a recovery here over the next few days and weeks.
That being said, I have a concern about risk. I am not one who wants to take a hit by being overly eager to be in a stock. What to do in this situation? I recommend a collared trade.
I'm buying Broadcom, selling the 44 calls which will bring in .40 and buying the 40 puts which will cost me .20, net credit .20. If we trade up to 44 by expiration I get called way with my 1.00 profit on the stock and I get to keep the .20 that I took in as a result of the net credit from the option position.
For two weeks work, $1.45 profit on the position would be fine for me. However, if you'd perfer you could do the 45 calls which would result in a "costless collar" and no profit from the option side of the trade, but give you another 1.00 potential on the stock side. I want to own Broadcom for a few weeks on the potential for some upside. But I also want to protect myself against the downside. A collared long is the way to achieve this.
Additional disclosure: Long BRCM, Long BRCM 40 Puts, Short BRCM 44 Calls.