Quick bulls cash in on Broadcom

Broadcom dropped as chip makers sold off today, but nimble option traders could have escaped with big gains if they acted early.

On May 18, Investitute’s tracking systems showed that 2,740 Weekly $247.50 calls expiring today were purchased for $1.87 with shares at $230.19. This was clearly a new position, as open interest in the strike was a mere 10 contracts before the trade appeared.

This morning those calls traded as high as $9.80, representing a profit of more than 400 percent. The stock was up 11.2 percent in the same period, underscoring the kind of leverage that can be achieved with options.

Long calls lock in the price where the stock can be purchased, gaining with a rally and providing leverage to the underlying shares. The contracts can quickly lose value if the stock stalls or pulls back but also carry less risk than owning the shares themselves.

AVGO opened trading today at $255.51 but closed at $243.41, down 4.55 percent on the session. The semiconductor company gapped up from below $235 on June 1 after reporting strong quarterly results.