Shares of Apple (AAPL) are down 2.5% today on concerns out of Asia that the company has cut orders by half for the next two months for its recently released iPhone 8. This is has been a notoriously hard way to trade AAPL for more than a decade but this news comes on a day that AAPL supplier Taiwan Semiconductor (TSM) reported a Q3 earnings decline (7%) less than analysts consensus while also offering double-digit revenue guidance in the current quarter given optimism regarding Apple’s impending release of their high-end iPhone X!
It’s interesting to note that TSM is the largest weighted stock in the SMH, the Semiconductor etf at nearly 11% followed by Intel (INTC) at 9.2%. TSM sports a $213 billion market cap, and its 43% gains year to date makes its gains in market cap terms greater than Nvidia’s (NVDA) 85% ytd gain now sporting a $118 billion market cap. The main point here is that a major AAPL supplier (TSM gets 16% of their revenue from the iPhone maker) is driving a good bit of the SMH’s ytd outperformance to broader tech (SMH up 37% ytd vs Nasdaq Comp up 22%). The takeaway here is that if the iPhone 8 launch really is disappointing and the combination of the potential for limited supply and possibly weak demand because of the price point for iPhone X causes weak iPhone sales, the SMH could retrace a bit of its outsized ytd move into year end.
September was an interesting month for the chart of the SMH, having finally broken out above what some traders might have thought was a massive technical resistance point at $90, the massive reversal level from June that culminated in a nearly 10% peak to trough correction:
Obviously, there is no overhead resistance on this chart, and the etf is likely to tick $100 before its all said and done, but the space could be approaching some headwinds as smartphone upgrade cycles elongate, m&a activity has slowed dramatically and valuations are becoming stretched for many companies in the smartphone supply chain that are not exposed to emerging technologies.
Shor dated options prices have ticked up in the SMH of late, but 30 day at the money implied volatility at 19% is still well below its 52-week highs made in July at 25.5% and its early 2016 high of 34%:
Given the low levels of implied volatiluty in the market as a whole though, options prices are generally high for those looking to express long premium directional views.
AAPL is scheduled to report its fiscal Q4 results on Nov 2nd, and this could be an event worth targeting for those in the supply chain if the company were to issue guidance that suggests iPhone 8 is not selling well and IPhone X will be capacity constrained.
If I were inclined to make a defined risk bearish bet in the SMH I would target about an 9% pullback (much like we saw in early July) back towards prior technical resistance, that should now be technical support at $90.
So what’s the trade?
SMH ($97.50) Buy Nov 97 / 90 / 83 Put Butterfly for $1
-Buy to open 1 Nov 97 puts for 1.80
-Sell to open 2 Nov 90 puts at 52.5 cents each or $1.05 total
-Buy to open 1 Nov put for 25 cents
Break-even on Nov expiration:
Profits of up to $6 between $96 and $84 with max gain of $6 at $90
Losses of up to $1 between $96 & $97 and between $84 and $83 with max loss of $1 below $83 and above $97
Rationale: this trade risks about 1% of the etf price, offers a very near the money break-even down 1.5% but offers an attractive 6 to payout in the event the etf does have a meaningful correction off of an all-time as we head into earnings season.