Investors may be too bullish on chip stocks. This options strategy can hedge against a pullback
Chips remain on fire in 2024 despite the recent volatility in earnings reports. Investor sentiment unequivocally is that semiconductors will continue to rally into year-end. That bullish consensus makes this former CBOT pit trader take pause, and I believe now is the time to hedge some semiconductor exposure. I want to use put options in the VanEck Semiconductor ETF (SMH) to mitigate downside risk. As Nvidia CEO Jensen Huang has been on a coast-to-coast roadshow, the AI darling has hit a new all-time high of $140.89 on Thursday. That came in the wake of better-than-expected results from contract chipmaker Taiwan Semiconductor , which counts NVDA as one of its biggest customers. (NVDA has a 21% weighting inside of SMH) The only warning for chips has been in recent earnings from ASML , the Dutch microchip-equipment maker. ASML got taken to the woodshed after saying the market recovery for semiconductors will take longer than expected, sending shares sharply lower. Again, this has been offset as NVDA’s CEO consistently has articulated demand is “insane.” We have to wait until 11/21 for their earnings. For clarity, I am not walking away from my AI exposure, I just want to hedge and synthetically book profits as SMH is up more than 40% after being rising 72% in 2023. There was an old adage on the trading floor in Chicago: “Pigs get fat, Hogs get slaughtered”. Lastly, I want to consider the technical setup, as when emotion gets injected into the marketplace, technical typically take over. I anticipate another retest of the 50-day moving average down at $228. The trade: buying a put spread Bought the SMH regular expiration Nov. 15 $245 Put for $7.00 Sold the SMH regular expiration Nov. 15 $225 Put for $2.50 This debit spread is costing an investor $4.50 or $450 per one lot spread This spread was executed when SMH was roughly trading $252 If this spread fills out to the downside, an investor will make the difference between the strike prices ($20) and the cost of the spread ($4.50), $15.50 or $1,550 per one lot. Understanding what your notional exposure to semiconductors and how much you are willing to define and spend on downside protection will help you decide how many spreads to own. DISCLOSURES: Kilburg owns SMH puts. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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.
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