A Billionaire Set Us Up Perfectly for This Options Trade

Billionaire investor Stanley Druckenmiller recently made a big investment in Broadcom (AVGO), increasing his stake to 239,980 shares. 

That stake, up 35% since September, is worth almost $56 million, one of the largest holdings in Druckenmiller’s private family fund. Now, Broadcom shares have surged almost 70% recently, so the stock is probably due for a breather.

But Druckenmiller’s big bet suggests there’s plenty of upside potential left.

I anticipate some consolidation into January and perhaps even February before the stock makes its next big move. That’s why the trade to make on Broadcom in the near term is a short iron condor.

Let me show you.

The short iron condor is a combination of a short call spread and a short put spread – a trade that sells premium on both the lower and upper bounds of price under the notion that prices remain rangebound in consolidation of strength.

As a result, the position loses the value we collected for selling it, and we are able to buy it back at a cheaper cost and keep the difference as profit for holding the spreads over time. 

Here’s the trade structure I’m looking at:

• Sell to open 1 AVGO 17 Jan 260 calls 
• Buy to open 1 AVGO 17 Jan 265 calls 
• Buy to open 1 AVGO 17 Jan 220 puts 
• Sell to open 1 AVGO 17 Jan 215 puts 

At this writing, the credit collected is $1.67 and this number represents the total profit for the position.  

The reason I chose these particular strikes is because of AVGO’s support and resistance levels. The relative resistance zone currently sits right around $250, and from here we should consolidate (move around within a range of price for a period of time). The relative support is near $225.

This strategy provides four outcomes to exit the trade: 

1. Buy back the iron condor as its value erodes – I like to collect 50% of the original collected premium, in general. 
2. Buy back the iron condor within ten days of expiration, especially if there is no movement in price. 
3. If the prices spike above the short strikes (in this case, above $260 or below $220) for more than 3 days: exit the position, irrespective of where profits sit. 
4. Buy back the iron condor if it moves above your threshold for loss – usually between 35%-50% above the collected premium.

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