Taiwan Semiconductor (TSM) stock is showing impressive price action and it could continue to grind higher in the lead up to earnings on July 17th.
One way to take advantage of that directional opinion is via a diagonal call spread.
Let’s look at an example using Taiwan Semiconductor.
Taiwan Semiconductor Diagonal Put Spread Example
The trade I’m looking at is selling a July 18 call with a strike price of $240 and buying an August 1 call with a strike price of $245.
As of yesterday’s close, the July 18 call could be sold for around $1.90 and the August 1st call could be bought for 2.40.
The trade would result in a net debit of $50.
The maximum risk on the trade is calculated by taking the difference in the spread (5) multiplied by 100 and adding the premium paid ($50). That gives a maximum loss of $550.
The maximum potential gain is around $550 which would occur if TSM closes right at $240 on July 18.
The trade has a nice profit zone in between $220 and $250.
Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp rally in TSM stock early in the trade. For this reason, if the stock rises above $240 in the next few days, I would also consider closing the trade early to minimize losses.
The ideal scenario is a slow grind higher up to the $240 level around mid-July.
The initial trade set up has a delta of 1 meaning the position is roughly equivalent to owning 1 share of TSM stock. Note that this delta number can change significantly as the stock starts to move.
Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.
Provided TSM stock stays below $240 in the next week or so, the trade should be ok.
Taiwan Semiconductor Company Details
The Barchart Technical Opinion rating is a 56% Buy with a Strengthening short term outlook on maintaining the current direction.
Taiwan Semiconductor Manufacturer Co is the world's largest dedicated integrated circuit foundry.
As a foundry, the Company manufactures ICs for its customers based on their proprietary IC designs using its advanced production processes.
TSMC's goal is to establish itself as one of the world's leading semiconductor companies by building upon the strengths thathave made it the leading IC foundry in the world.
Of the 11 Analysts following TSM there are 8 Strong Buy, 2 Moderate Buy and 1 Hold recommendations.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
