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What if you were paid to buy Broadcom shares at a lower price? Instead of buying the stock outright, I am considering selling a cash-backed put option to capture the premium and at the same time potentially enter the stock at a discount. Let me show you the strike price I'm looking at and exactly how selling a put option on AVGO would work.
First, I'll talk about the stock itself, why I like it, and then I'll show you how to choose the strike price for selling a put option. Broadcom is one of the companies benefiting from significant changes in how the world's largest technology businesses build their AI infrastructure. Amazon, Google, and Meta are spending huge sums on artificial intelligence, but they don't necessarily want to buy all their chips from Nvidia.
And this is a smart approach on their part. You don't want to run the risk of being dependent on a single supplier . They also develop their own chip designs for their specific tasks. And this is where Broadcom comes into the picture. Broadcom helps large technology companies design their own AI accelerators, and also supplies networking technology to connect thousands of chips in huge data centers.
Think about it this way. If you're building a data center with tens of thousands of GPUs, having powerful chips isn't enough. All of these processors must interact with each other. Otherwise, you're spending billions of dollars on equipment that can't even function effectively. And the larger these AI clusters become, the more important the network infrastructure becomes.
Now let's look at Broadcom's financial results. I will put them on the screen. The company just reported $29.6 billion in quarterly revenue, up 86% year-over- year. Revenue from AI semiconductors reached approximately $16.7 billion, up 221% from a year earlier. Management expects AI semiconductor revenue to be around $ 21.7 billion next quarter.
This is an extraordinary growth rate for a business of this size. But there is another indicator that I find particularly interesting. Broadcom generated $13.7 billion in quarterly free cash flow, which is about 46% of revenue. This cash generation is important because Broadcom is not solely dependent on AI products.
It also owns VMware, which gives it a large infrastructure software business in addition to its semiconductor operations. Therefore, the company has a market share in custom chips, networking solutions, and corporate software. The biggest risk is that some of Broadcom's largest customers are also trying to develop more of their own technology.
If in-house chip development becomes more competitive or large customers switch suppliers, this could impact future growth. And after such a significant increase in AI revenue, investors are already expecting the company to show significant growth. I would watch to see if Broadcom can really sustain AI revenue growth and free cash flow margins as the business scales.
I've talked about free cash flow a few times on this channel, but it's actually the most important metric that Wall Street looks at. When I worked at Goldman Sachs and two other hedge funds, in my experience, every time I spoke to an analyst, they always talked about free cash flow. And it's not just like that .
This is a very important indicator. Okay, guys, let's go to my screen, I'm looking at Broadcom stock. Broadcom is currently trading at $353 per share. And over the last 3 months, the stock has fallen a bit. That is, on August 7, they were trading at $427 per share. I want to take a quick look at the technical analysis and show you the 6- month chart.
On a 6- month chart, it is up about 20%, and as it has moved away from its high, the stock was trading above $480 per share back in June. So, I think Broadcom could become a $400 stock in the next 3-6 months. This is just my target price, but the position I'm going to show you is a put option on Broadcom.
As stocks are down a bit , but here we see a nice rebound from September 16th . This seems like a good support level, Broadcom has been at $339 per share for two days in a row. I am going to trade AVGO options and we will consider selling a put option. When I plan to sell a put option, I essentially want to buy those shares.
So, 339 is the level at which I think the stock is well priced, it's a good deal. Therefore, I will choose a short-term expiration date of November 20, which is 50 days. And this option, I'll go a little lower, but you can already see that even the strike price of 350 has a breakeven point of $331. So, the breakeven point is below the support level.
So in this case I would be willing to sell with a much higher delta. So, a delta of 0.45 on AVGO suits me perfectly. While I usually prefer to sell low delta and out-of-the-money options, in the case of AVGO I don't feel the need to because I just like the stock and its current trading level is already close to the support levels at 339, in my opinion.
So if I get assigned at 350, with a $17 premium, it will actually push the price below the support level, which is why I confidently sell the put option on AVGO with an expiration date of November 20. Thus, my breakeven point is below the support level. I like AVGO, so my goal is to own the shares through the exercise of the option.
Selling put options is one of the key strategies I use in my own portfolio, and also one of the main strategies I teach in my Discord community. If you want to learn more about selling put options and get the full free course, watch this video here. This is a complete free step-by-step course on selling put options for beginners and intermediates on YouTube.
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