In March we checked in on the Semiconductor space a couple times, with some events on the docket from large omponents like Micron (MU) and Applied Materials (AMAT). After detailing an initial short biased trade on May 8th that was quickly proven wrong with the ETF a little bit higher we discussed closing that trade for a small loss and detailed a new trade structure that was a little less agressive and took advantage of higher strikes. Here was that trade, a put butterfly, from May 18th:
SMH ($105) Buy July 105 / 95 / 85 Put Butterfly for $2
-Buy to open 1 July 105 put 3.80
-Sell to open 2 July 95 puts at 1.05 each or 2.10 total
-Buy to open 1 July 85 put for 30 cents
SMH was 105 at the time and with under a month to July expiration it is a bit lower, now trading below 103. With SMH now 102.80 this put butterfly is now worth about 2.30, so a small profit. Intrinsically it’s worth not much different, if SMH closed 102.80 on July expiration it would be worth 2.20. So from a trade management standpoint this will start to trade more and more like the 105 put at an intrinsic value (105 – current stock price) as we get closer to expiration. The negative decay in that put will be offset by the positive decay (collecting) from the 2x short 95 puts. Therefore this is really a matter of conviction. If SMH bounces and goes above 105 in the next few weeks the entire trade can be worth zero. If it heads lower it can be worth up to 10 (the ideal close for this is 95 on July expiration). Therefore it makes sense to keep a stop on the upside and not let this become worthless if the market rallies, and with nearly $8 of room to the downside to the max gain level one can be patient if the market heads lower.