Broadcom (AVGO) may well be one of the top tech stocks currently available on the U.S. stock market, with a Smart Score of 10 from TipRanks, indicating broad analyst confidence, hedge fund exposure, and positive investor sentiment. Just about the only negative against AVGO stock is that insiders have sold shares over the last three months, which isn’t unusual, especially with end-of-year tax considerations in mind.
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Still, what has been notable about the semiconductor and software giant is its slow performance in the new year. So far this year, AVGO stock is down ~8%. Meanwhile, broader tech-sector concerns stemming from Intel’s (INTC) latest earnings results — where soft guidance led to a 17% loss in share value — doesn’t help.
Despite the current lack of confidence in AVGO stock, the broader narrative hasn’t changed. Thanks to artificial intelligence (AI) and related innovations, Broadcom’s specialties are likely to become increasingly relevant. Therefore, the fundamental implication is that, while there are immediate challenges and concerns, the longer-term picture is compelling. Subsequently, a bullish posture may be prudent amid the present weakness.
Now, there are two basic approaches to express this optimism. First, one could adopt a long-term approach and simply build a long exposure to AVGO stock. Second, the more exciting approach is to leverage stock options to generate short-term profits. As readers will soon see, the options market is possibly the best tool for taking advantage of shifting investor sentiment and the inevitable stock volatility that ensues.
Getting the Lay of the Land for AVGO Stock
At the heart of a debit-based trading strategy is the search for suboptimal pricing to exploit. Essentially, we’re looking to bet on an anticipated outcome whose risk profile isn’t adequately priced. But before we can start scanning for these pricing inefficiencies, you must understand what the market is looking for.
In the case of AVGO stock, for the February 20 options chain, the Black-Scholes model is outputting a forward dispersion of $289.71 and $348.45. This projected range represents a high-low spread of 9.2% relative to the current spot price of $319.96 (last Friday’s close). Essentially, the dispersion represents where prices one standard deviation from the spot price would symmetrically fall when accounting for volatility and days to expiration.
Without delving too deeply into the mathematics behind this strategy, the Black-Scholes model is colloquially saying that, in 68% of cases, at the end of February 20, AVGO stock would likely trade between $290 and $349. While this range is instructive, it doesn’t really give us a clue what options traders are thinking. We just have a wide range of where AVGO could end up.
To further narrow the narrative, we may look at volatility skew. For the February 20 options chain, the elevated IV for put options across multiple strike prices suggests that smart money traders are prioritizing downside protection.
It’s not that they’re outright skeptical about AVGO stock; otherwise, you’d see a flurry of sell orders. The most important takeaway is that options traders are very much participating in AVGO, but they’re doing so in a risk-averse hedged manner.
Another interesting angle is that because traders are prioritizing downside protection, AVGO stock call options are relatively cheap. Therefore, if you had reason to believe that Broadcom can swing higher, the stock could be considered a discount — and that’s exactly the modus operandi I’m proposing.
Running a Second-Order Analysis on AVGO Stock
While the above insights from Black-Scholes and the volatility skew screener help illuminate the situation, they still don’t tell us which outcomes are most likely to materialize. In other words, we have a wide dispersion of prices to consider, and we also know that the smart money is buying downside insurance. Nevertheless, we’re no closer to understanding where AVGO stock may congregate on the February 20 expiration date.
To achieve a better approximation, we need to resort to a second-order analysis based on the Markov property. Under Markov, the future state of a system depends solely on the current state. Stated differently, forward probabilities can’t be calculated independently but rather must be assessed in context.
To use a simple sports analogy, in American football, a 20-yard field goal attempt is an easy three points. Add the context of snow, wind, and playoff pressure, and the odds may change quite dramatically.
For AVGO stock, the immediate context is that, in the last 10 weeks, the security printed only four up weeks, leading to an overall downward slope. Typically, under aggregate conditions since January 2019, a long position in AVGO held for a 10-week period would be expected to land between $310 and $360. However, under 4-6-D conditions, forward outcomes would likely range between $300 and $375.
That’s still a wide dispersion. But using a hierarchical analysis, probability density would likely peak between $325 and $355, thus narrowing our upside target. What’s more, over the next five weeks (which would roughly coincide with the February 20 options chain), probability density would likely peak between $330 and $340.
At this point, it becomes a simple matter of going with the numbers. Based on the market intelligence above, I’m attracted to the 337.50/340.00 bull call spread expiring February 20. This wager requires AVGO stock to rise through the second-leg strike (340) at expiration to trigger the 163% maximum payout.
What’s appealing here is that $340 should be a statistically realistic target based on the above Markov framework. Moreover, the breakeven for this call spread is $338.45, which adds to the trade’s credibility.
Is AVGO a Good Stock to Buy?
Turning to Wall Street, AVGO stock has a Strong Buy consensus rating based on 28 Buys, one Hold, and zero Sell ratings. The average AVGO price target is $459.89, implying 43.69% upside potential in 2026.
Using an Inductive Options Approach to Find Alpha in AVGO Stock
Although the options market is signaling some movement over the next few weeks, first-order analyses provide only the broad parameters of what can be expected. To drill into what is actually likely, we must conduct a second-order analysis, which potentially reveals a leaning toward the $340 price. As such, bullish speculators may be incentivized to turn to the options market and consider a near-term call spread.