A few weeks ago when the Semiconductor etf, the SMH was trading $97.50 I detailed a near-term bearish view heading out of earnings season and into Apple’s iPhone X launch this week (read here)
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.
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.
Well earnings have been fantastic for most semiconductor companies, with the second largest holding in the SMH, Intel (which I’ve been long read here, here & here) exploding over the last 2 months, up 35% since the start of September. Today, Qualcomm (QCOM, the 9th largest holding in the SMH is up 13% and Broadcom (AVGO) is up 5% on rumors that the latter will buy the former. And last but certainly not least, Nvidia (NVDA) the third largest holding in the SMH is trading within a whisper of its all-time highs, up a whopping 95% on the year.
NVDA is scheduled to report their Q3 results on Thursday after the close. The options market is implying about an 8% move in either direction or about $10 billion in market capitalization, equal to this years expected sales!
I am hard-pressed to think that NVDA has much more to go on the upside near term, and the stock’s reaction to results (if good results and sells off, or bad results and sells off) could be the start of a bit of a cooling off period for the SMH, which is up 42% ytd vs the SPX up 15.5% and the Nasdaq up 25.5%.
I was obviously a little early on the Nov put butterfly detailed on Oct 19th, but I now want to roll this bearish view up and out a bit.
So what’s the trade?
Still targeting $90 to the downside, which was the September breakout level, But I want to give the trade some more time.
SMH $102.50 Buy Jan 102 / 90 put spread for $3
-Buy 1 Jan 102 put for $4
-Sell 1 Jan 90 put at $1
Break-even on Jan expiration:
-Profits of up to 9 between 99 and 90, max gain of 9 at 90 or lower
-Losses of up to 3 between 99 and 102
Rationale – This trade breaks even down a few percent from the current price and has plenty of time for these stocks to reverse. Risking $3 to make up to $9 is good risk reward on a chart that has gone so parabolic. Im the case the move continues higher, risk is capped at $3.