Update: SMH – A Semi Fiasco

by Dan October 12, 2018 3:16 pm • FREE ACCESS

Regular readers know that since the Semiconductor group, as measured by the SMH etf topped out in March I have been rolling a bearish view, most recently in August (SMH MEH) and in September (A Semi Mess). Why continue to roll? Well in each instance since the spring it seems there have been a new headwind popping up, my rationale in Sept:

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.

And here was the bearish trade idea from Sept 6th when the SMH was 106.50:

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

Today the SMH is $96.80 and the Nov put spread detailed above is worth almost $7. It makes sense to close this and use some of the profits to roll down…

$95/94 appears to be healthy near-term support, that it must hold…

But the 5-year chart below shows the recent breakdown below the uptrend from the early 2016 lows:


A break below $95 and it looks like bombs away on the short side.

So what’s the Roll?

Bearish Trade Idea: SMH ($97) Buy Nov 95- 85 put spread for $2

-Buy 1 Nov 95 put for $2.65

-Sell 1 Nov 85 put at 65 cents

Breakeven on Nov expiration:

-Profits of up to 8 or 4x the premium at risk between 93 and 85, max gain below 85

-Losses of up to 2 between 93 and 95 with max loss above 95