Despite taking a beating in the latter part of August, most chip stocks have staged an impressive relief rally so far. But the rally appears to be losing steam as many of these stocks are exhibiting a similar chart pattern where they are facing pressure near a previous resistance zone. I am basing this trade on the age-old concepts of support and resistance zones.
Looking at the 6 month chart below, we can see that Broadcom (AVGO) is facing some resistance at the $168 area which happens to be short term resistance. Additionally, it's worth noting that the RSI (Relative Strength Index) is starting to curve downwards, signaling a loss of upward momentum. With Fed's first rate cuts due to be delivered Wednesday, markets are showing some signs of over-exuberance, so it might be worthwhile to allow post FOMC volatility to settle down before indulging in this trade.
The trade The trade structure I am using here is called a "bear put spread". At the time of writing this, AVGO was trading at $164. To construct my bear put spread, I will need to buy a $170 put and sell a $168 put as a single unit.
Note that for this order to get filled at the limit price of $2.50 mentioned below, the stock may need to catch a bid and trade slightly above $165. Here is my exact trade setup: Buy $170 put, Oct 4th expiry Sell $165 put, Oct 4thth expiry Cost: $2.
50 If AVGO is trading at $165 or below on the expiration date, this trade will double my money, providing a 100% Return on Investment (ROI) on th.