Regular readers know that despite picking my spots from a trading perspective in a couple individual names of late (AMD here and INTC here) I have had a broadly dim view of semiconductor stocks as a group, with my most recent defined risk bearish trade idea in mid August (read here) in the SMH, the etf that tracks 25 U.S. listed Semiconductor stocks. With stocks like Micron (MU) and KLA Tencor (KLAC) each down about 10% on KLAC’s commentary this morning at Citi’s Tech conference that their “December quarter up a little less than we thought” its worth re-addressing this view on the eve of the potential of trade tensions ratcheting up with China.
Lets first look at the trade idea of SMH from August 14th:
SMH ($105.66) BUY OCT 105 / 95 PUT SPREAD FOR $2.45
-Buy to open 1 Oct 105 put for $3.40
-Sell to open 1 Oct 95 put at 95 cents
With the stock at $106.50, this put spread is worth about $2.20 or about a 25 cent loss, and it might make sense to roll this view out to November in an effort to catch the bulk of its components Q3 earnings. Why roll? Well if KLAC, an equipment maker is sounding the alarm with almost a month to go in the quarter, then there is a very good chance that results and forward guidance could be overly optimistic by the time the bulk of their competitors and customers report in late Oct (after expiration). If I were coming to this situation with fresh eyes I might consider the following trade idea in November expiration:
Trade Idea: SMH ($106.50) Buy Nov 106 / 95 put spread for $3
-Buy to open 1 Nov 106 put for 4.30
-Sell to open 1 Nov 95 put at 1.30
Break-even on Nov expiration:
Profits of up to 8 between 103 and 95 with max gain of 8 at 95 or lower.
Losses of up to 3 between 103 and 106 with max loss of 3 above 106
What could cause other guide downs and/or weak forward guidance? If the president follows through with his threat to impose a further $200 billion in tariffs on China, then they are certain to retaliate. This escalation in the trade war will give corporate management’s to guide down, but it is also likely to cause investors to sell first and ask questions later.