A bearish options trade that wins if the AI-led chip stock rally runs out of steam

After being overbought for months, the Nvidia-led tech rally appears to be losing steam. I’ll discuss a bearish options hedge on a member of the chip sector that appears to be breaking down. Below is a 6-month daily chart of the iShares Semiconductor ETF (SOXX) , which monitors the chip sector. On March 8th, a significant bearish engulfing candle emerged. In an uptrend, such a candle often indicates an imminent shift in direction. This phenomenon is evident in the semiconductor space, with many chip stocks such as Nvidia, AMD, and Broadcom showing signs of a pullback. Among the semiconductor stocks, Micron (MU) stands out as a notable example. Upon examining the 6-month daily chart of MU, several indicators suggest an impending trend reversal. RSI (Relative Strength Index): I’ve used RSI to assess weakness. It’s a straightforward tool — when the RSI goes above the 70 area, a stock is considered overbought. However, since securities can remain overbought for extended periods, it’s important to wait for the RSI to dip below 70 before considering a bearish trade setup. This is exactly what is unfolding with MU right now. The second piece of evidence comes from price action itself. The chart below shows a series of lower highs and lower lows confirming the downtrend. The Trade Setup: The trade structure I am using here is called a “bear put spread” also known as “put debit spread”. Here is my exact trade setup: Buy Micron $121 put, May 3rd expiry Sell Micron $120 put, May 3rd expiry Cost: $50 Potential Profit: $50 I have chosen May 3rd as the expiration for this trade which is only 17 days away. I have done this because in my experience, bear put spreads yield results very quick and work best between 14-21 days. If MU trades at or below my short strike by the expiration date, this trade can yield a 100% ROI on the amount risked. With 20 contracts, this equates to risking $1000 to potentially gain $1000 and all I need is for MU to move $1 in my direction. MU YTD mountain Micron, YTD Earnings season brings a plethora of uncertainty with it, often resulting in knee-jerk market reactions. Any positive tech earnings released during the trade window pose a risk to this position. -Nishant Pant Founder: Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: Nishant has a bearish position on MU expiring on 4/26/24 THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.