2 Key Technical Must-Aware Before Broadcom Earnings: Strategies for 0DTE Options or Short-Term Plays in Bull or Bear Cases

AI momentum is back, with the Nasdaq needing a 4%+ rally to reach the record high, despite ongoing tariff and geopolitical uncertainties. Nvidia has overtaken Microsoft as the most valuable public company, and Broadcom has broken another high, suggesting that AI optimism outweighs potential economic drawbacks. Broadcom’s earnings report on Thursday after market close could be the next trigger. The ASIC giant is expected to deliver robust results, fueled by the soaring demand for AI. However, investors should closely monitor two extreme technical signals and the opportunities from each likely post-earnings scenario. Here’s a strategy to play short-term moves or more aggressively with 0DTE options, using technical and historical data as a guide.

Extreme Bullish Signals Suggest Pullback

Investor sentiment towards Broadcom (AVGO) earnings is extremely bullish, given the tech giants’ continued investments in AI and the rising demand for customized AI chips. This guarantees better-than-expected earnings and guidance, particularly since the majority of its customers are U.S.-based, with no risks like those faced by Nvidia, which is subject to chip curbs. However, much of this bullish sentiment has already been priced into the stock.

Ahead of earnings, AVGO shares jumped 8% this week, marking a record high and an 89% rally from April’s bottom. In comparison, the Nasdaq Composite is still below its December high, and Nvidia is yet to reach its pre-DeepSeek levels. This suggests that Broadcom’s strong alpha is driving the price higher.

With shares at record highs, bullish sentiment has reached extreme levels. The RSI closed at 93.89 on Wednesday, a level not seen since late June 2024. The last time the RSI reached such an extreme, the stock fell by more than 14% over the next five trading days, indicating the risk of a pullback amid an overheated RSI.

These factors suggest that Broadcom may have entered an overbought zone before earnings. Even better-than-expected earnings may not satisfy investors, who may be looking for even more to justify their risk-on behavior. Traders expect an implied 7% move post-earnings (using at-the-money options expiring Friday), indicating high volatility, which adds to the market's anxiety.

This situation presents opportunities. A more robust earnings report could drive AVGO shares higher again, or a failure to meet investor expectations could lead to a free fall. Both scenarios offer long and short opportunities, including for more aggressive traders using 0DTE options. Below are the most likely scenarios and how traders can position themselves:

Scenario 1: Excellent Earnings, Stock Rises Initially

In this base case, strong AI demand and bullish sentiment could push the stock higher initially. However, existing investors might lock in gains, causing a pullback. This is exactly what happened in the last two earnings reports.

For example, after Q1 earnings on March 7th, shares initially jumped over 6% by 9:34 AM, then narrowed to 3.6% by 9:38 AM as early investors started to cash out. With 0DTE put options, the value could have increased by 50%+. For those who remained patient, the shares continued to rally but with smaller gains, narrowing to a 1.6% increase by 10:40 AM, at which point ATM put values easily doubled or even tripled.

Similarly, after the Q4 earnings report on December 13, the stock initially jumped 23% by 10:22 AM, but the rally soon faded to 18% by 11:56 AM, providing a 5% shorting opportunity.

For 0DTE options, it’s essential to act quickly, as the theta decay accelerates as expiration approaches. Setting clear limit orders or stop losses is crucial when using only a portion of your funds. The potential gains can be substantial, but the downside risk is limited.

Traders also should avoid buying options at the market open when volatility tends to be high. Instead, it's better to buy at-the-money options, as out-of-the-money options are riskier.

Alternatively, short sellers or ETF short traders (e.g., AVS) would focus on how much AVGO might fall from its high. This is a simpler trade, potentially locking in 3% gains. However, the move may be more of a day trade, as selling pressure will likely fade and the stock could rebound, as seen after the last two earnings reports. Ultimately, this trade is more about sentiment than fundamentals. AVGO’s fundamentals are solid, given the continued AI growth. Traders might even flip positions to long after the initial sell-off if guidance is strong.

Scenario 2: Excellent Earnings, But Investors Are Disappointed

In this scenario, AVGO reports excellent earnings, but fails to impress investors who decide to take profits. If the stock drops more than 5% initially, traders may consider it a potential dip-buying opportunity.

Technical selling could occur in advance, driven by the "sell on the fact" mentality. The selling pressure may intensify as market hours begin, but remember that this is a correction from an overbought situation, not a fundamental issue. If a significant correction happens, fundamental investors might step in, driving the stock back up in a "V-shaped" recovery.

In this case, traders could buy the dip gradually, watching for signs of a reversal. If the stock continues to form a "higher high" and "lower low" pattern, caution is advised. Post-earnings volatility is expected, so focus on the performance of AVGO on Friday and Monday. For more aggressive traders, buying 0DTE calls on an initial dip could be an option, but this comes with the risk of significant losses if the market moves against them.

Broadcom’s fundamental outlook remains strong, as U.S. tech giants continue to drive demand for ASIC chips to expand AI capabilities. Partnerships with companies like OpenAI and Meta may lower costs and improve energy efficiency, which gives AVGO an edge over Nvidia. Furthermore, there are no export restrictions to worry about. From a long-term perspective, AVGO still has potential, and the overbought condition could be the only concern.