Broadcom Announces Stock Split: What Traders Should Know
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Broadcom Announces Stock Split: What Traders Should Know
Broadcom jumps on revenue surprise, stock split news
Broadcom (AVGO) stock surges over 13% in Thursday trading.
Chip maker beat estimates and increased revenue outlook.
Announced a surprise 10-for-1 stock split effective July 15.
Broadcom (AVGO) delivered stellar results on Wednesday after the bell, pushing the stock over 13% higher in Thursday morning trading. The Apple (AAPL) chip supplier saw second-quarter profits at $10.96 per adjusted share, beating street estimates.
Strong demand for data centers supported revenue. Robust demand comes amid the artificial intelligence boom that has catapulted other chip makers’ earnings Broadcom's revenue for the quarter was $12.5 billion—a 43% increase from a year ago.
Hock Tan, president and CEO said: “Broadcom's second quarter results were once again driven by AI demand and VMware. Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds.”
Broadcom increased its guidance for fiscal year 2024 to $51 billion consolidated revenue and adjusted #EBITDA to 61% of revenue, according to a company statement.
Broadcom also announced a 10-for-1 stock split, the first one since it merged with Avago Technologies back in 2016. The move comes after Nvidia (NVDA)—the leader in the AI chip space—announced its own 10-for-1 stock split last month.
What does the stock split mean for traders?
The split-adjusted basis for shares will commence at the market open on July 15, 2024. Stockholders of record as of July 11 will receive nine additional shares for each share of common stock held after market close on July 12.
Simply put, if you have AVGO shares on July 11 and hold them until July 13, you will see your amount of AVGO shares increase by nine for every share held. Because it is a 10-for-1 split, that also means that the stock price will trade at a tenth, or 10%, of its pre-split value.
Trading Broadcom post-earnings
The number of options contracts will increase tenfold for those holding options through the split. Therefore, if you held a call option in Broadcom before the split, post-split, you would hold ten contracts, with the adjustment in strike price reflecting a tenth of the value. This allows the mechanics of the trade to remain mostly unchanged.
Theta and Gamma Adjustments
However, there are some adjustments to be aware of, particularly around theta and gamma.
Theta: The premium collected will decrease due to the lower strike prices. However, this shift will not significantly alter the risk-reward dynamics of such trades in percentage terms, only dollar terms.
Gamma: The gamma—or the rate of change in the delta as the stock price moves—will see a decrease in its dollar value significance. This change means that relative percentage shifts in the stock price will result in smaller absolute dollar movements, affecting the sensitivity to price changes within an option's pricing model.
Greeks/Trade Mechanics | Pre-Split ($1,674) | Post-Split ($167.40) |
Delta | 0.5 (50%) per contract | Remains 0.5 (50%) per contract |
Gamma | 0.02 per $1 stock move | Smaller absolute impact per $1 move |
Theta | -0.05 per day | Smaller absolute decay due to lower option prices |
Delta change (per $1 stock move) | Delta changes by 0.02 per $1 move (0.5 to 0.52) | Delta changes by 0.02 per $1 move (0.5 to 0.52) but with a smaller absolute impact |
Accessibility for traders | Higher contract value limits some traders | Lower contract value makes options more accessible |
Premium | Higher due to higher stock price | Lower due to reduced stock price |
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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