Tomorrow morning at Credit Suisse’s 23rd Annual Technology Conference in Scottsdale Arizona Bob Swan the CEO of Intel (INTC) will give the opening keynote at 9:15 am, immediately followed by their large customer, Applied Material’s (AMAT) CEO Gart Dickerson at 10 am. Throughout the rest of the day the CEO’s of Texas Instruments (TXN), Analog Devices (ADI), NXP Semiconductor (NXPI), Micron Technology (MU), Lam Research (LRCX) and others will be speaking at a time in the quarter where many semi company’s used to offer mid-quarter updates. WIth the SMH, the ETF that tracks the semi space up 52% on the year, more than doubling the performance of the S&P 500 (SPX), and down just 3% from its all-time highs made last month, I think it is safe to say that the slightest change in town from these CEOs could cause an unexpected pullback in the group, especially when you consider the on-again, off-again situation with our trade war with China.
A month ago the SMH broke out to a new all-time high above $130 and has held that level since to my eye below that level there appears to be an air pocket back towards the Oct lows near $120:
Backing out the chart to Jan 2018 and the uptrend that has been in place from the Dec 2018 lows confirms that $120 level of support:
Similar to most sector etfs, short-dated options prices are just off of 52-week and in many cases, multi-year lows, with 30-day at the money implied volatility at 21% (blue line below), just a tad above 30-day at the money realized volatility (white line below) which is basically how much the underlying has been moving. When the spread is as narrow as it is here, and off of lows, generally this implies that options are cheap for those looking to pick a direction with defined risk (being long options) if you one thought the underlying was about to move.
SO what’s the trade? To reiterate what just wrote, if you are looking to define your risk then long calls or call spreads for those who think semi commentary remains bullish with potential upside from a trade deal, or long puts or put spreads for those who think that given the uncertainty about a deal and the looming Dec 15th tariff deadline that the SMH could re-trace back to $120, then consider the following trade idea:
Bearish Trade Idea: SMH ($131.50) Buy Jan 130 – 120 put spread for $2.80
-Buy to open 1 Jan 130 puts for $4.25
-Sell to open 1 Jan 120 put at $1.45
Break-even on Jan Expiration:
Profits of up to 7.20 between 127.20 and 120 with max gain below 120
Losses of up to 2.80 between 127.20 and 130 with max loss of 2.80 above 130
Rationale: this trade idea risks 2.2% of the ETF price for nearly 2 months with a break-even down 3,3% with a potential payout of 2.5x the premium ar risk if the SMH is down 8.8% on Jan expiration, which the options marker suggests there is about a 20% chance of happening.
If you were inclined to play for a breakout to new highs and the SMH to keep surging into the new year I might consider just buying the Jan 132 call for $3.50 with the ETF at $131.50. This trade idea would break-even up at $135.50, right near the previous all-time high, up 3% and offer unlimited upside between now and Jan expiration.