On October 6th we to a look at the technical set up for the semiconductor group via the etf SMH. We identified some of the fundamental reasons for the massive out-performance in the space that had has resulted in a 75% rise from its February 2016 lows, resulting in a fairly epic technical breakout in July:
Following Intel’s (INTC) Q3 results last night, the SMH is down 1% in sympathy with INTC’s 5% decline. Here was the trade idea from early Oct that we detailed for those who agreed the SMH could re-trace a bit of the breakout in the coming month:
SMH ($69.25) Buy Nov 69 / 63 / 57 Put fly for 1.10
- Buy 1 Nov 69 put for 1.90
- Sell 2 Nov 63 puts at 45 cents each or 90 cents total
- Buy 1 Nov 57 put for 10 cents
With SMH now 67.40, this put fly is worth about 1.55 mark to market. Intrinsically it’s worth about the same at 1.60. Since the mid point of the fly is still much lower at 63 there’s still more profit potential but it’s dependent on the etf going lower from here. This isn’t a situation where patience pays off because if the SMH closed at this same level on Nov expiration the trade idea would be worth basically the same as it’s trading now. Therefore, on trade management it’s a matter of how convicted one is on a more significant pullback from here. The 50 day moving average is 66.66, and that’s a good level to keep on the radar. If the etf were to hold that level on a test below (could even happen today) then maybe those profits are enough. But if the etf is unable to hold that level then much more profit is possible as the max value of this trade is $6 if the etf was at 63 on November expiration.
On the flip side, with components QCOM, NXPI, TXN and NVDA set to report in the next two weeks, the etf could find footing after the INTC fall. In that case keeping a stop at the original cost of the trade idea is probably the right idea on the upside as there’s not a ton of room for error with it currently trading at its intrinsic price here.