Huge, Unusual Call Option Activity in Broadcom Shows Investors Bullish on AVGO Stock

Unusually large call option activity in Broadcom, Inc. (AVGO) today suggests investors are bullish. No wonder, as AVGO is at a 6-month low. A Barchart article today shows how AVGO is deeply undervalued.

AVGO is up over 2.5% in midday trading at $329.92. AVGO hit a 6-month low of $321.68 on Friday, Oct. 23. It peaked at $422.65 on April 22 and is now down $92.73, off -21.9%.

That's simply too much, given its strong revenue and free cash flow prospects. I wrote about this today in a Barchart article, “Broadcom Is At a 6-Month Low - Is AVGO Stock Too Cheap?”

As a result, institutional investors are buying longer-dated call options, expecting a huge spike in AVGO, especially after its upcoming Dec. 10 earnings results.

Unusual AVGO Call Options Volume

This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that over 7,200 call options have traded at the $355.00 strike price expiring on Nov. 20 (25 days from now). 

That volume is almost 22 times the prior number of calls outstanding at the $ 355 strike price for the Nov. 20 expiry. Given that the strike price is only 7.6% higher ($355/$329.92) than its present price, it implies heavy call option buying.

The $6 premium paid by call option buyers implies they expect a quick rebound to over $361, or more than 9.4% higher.

Sellers of these calls are also getting a good deal. For example, on a covered call basis, the $6.00 premium today represents a 1.82% yield for less than one month. Moreover, if AVGO rises $355, the covered call sellers make a total return of 7.6%.

The bottom line is that this call option activity shows investors are bullish on AVGO.

AVGO Looks Deeply Undervalued

And why not? My Barchart article today shows that AVGO could easily be worth 60% more at $530.45 per share. That's based on its strong revenue and free cash flow (FCF) margins.

For example, in its last quarter, FCF margins were over 46%. My forecast is based on Broadcom making just 44% FCF margins going forward. 

On top of this, analysts are projecting 64% higher revenue for the next fiscal year ending Oct. 31, 2027.

Moreover, analysts have similar price targets (PTs). Yahoo! Finance is at $529.10, and Barchart's survey PT is $524.33. These are 60% higher than today's price as well.

If Broadcom's Q4 FCF margins come in at 44% or higher and analysts maintain their higher revenue forecasts for FY 2027, AVGO will end up significantly higher.

The point is that AVGO looks too cheap here, and investors are taking advantage of this through unusual call options activity.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.