Back on August 4, I published an article on a couple reasons why I was starting to like Semiconductor stocks after a sharp sell-off.

Rather than buying individual names like Nvidia, I preferred the somewhat safer approach of buying the Semiconductor ETF (SMH). It is comprised of a basket of the biggest names and provides a portfolio effect to dampen overall price volatility.

Speaking of volatility, that was one of the reasons why I was looking to take a defined risk long position in the Semi stocks on further weakness. Implied volatility (IV) had rocketed to the highest reading in the past year.

The technicals were also deeply oversold setting up for a potent one-two punch that fits a bullish put spread perfectly.

Those interested in that previous analytic piece can read it here:

https://stocknews.com/news/smh-2-big-reasons-the-semiconductor-stocks-are-poised-for-a-49370762/

I also talked about it on my weekly Business First AM TV appearance:

https://www.youtube.com/watch?v=waLS1nWD2Vo

The trade I suggested was selling bull put spreads. My example was to sell SMH $200 puts and buy the $195 puts that expire August 16 for 80 cents net credit.

Potential gain on the trade was $80 per spread. The maximum risk on the trade was $420 per spread. Return on risk was 19% ($80/$420).

I was looking for SMH to move back towards the $230 area and for IV to dampen as well. The spread expired August 16 so short-term in nature.

It also expired before the two heavyweights in the SMH-NVDA and AVGO- report their earnings in a few weeks.

Lo and behold, the SMH did rally as expected and IV did soften considerably. SMH closed last Friday -August 16 expiration- at $246.71.

Shares once again bounced off major long-term support at $200.

The bull put spread expired worthless for a two week gain of 19%.

Highlights the benefit of taking a defined risk counter-trend position at extremes.

Find the edge then put on the hedge. It is what we do week in and week out at POWR Options.

For those interested in pursuing it further, the links are below.

POWR Options

What To Do Next?

If you’re looking for the best options trades for today’s market, you should check out our latest presentation How to Trade Options with the POWR Ratings. Here we show you how to consistently find the top options trades, while minimizing risk.

If that appeals to you, and you want to learn more about this powerful new options strategy, then click below to get access to this timely investment presentation now:

How to Trade Options with the POWR Ratings

All the Best!

Tim Biggam

Editor, POWR Options Newsletter

POWR Options

What To Do Next?

If you’re looking for the best options trades for today’s market, you should check out our latest presentation How to Trade Options with the POWR Ratings. Here we show you how to consistently find the top options trades, while minimizing risk.

If that appeals to you, and you want to learn more about this powerful new options strategy, then click below to get access to this timely investment presentation now:

How to Trade Options with the POWR Ratings

All the Best!

Tim Biggam

Editor, POWR Options Newsletter

SMH shares closed at $246.71 on Friday, up $0.34 (+0.14%). Year-to-date, SMH has gained 41.08%, versus a 17.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Tim Biggam

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network "Morning Trade Live". His overriding passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR Options newsletter. Learn more about Tim's background, along with links to his most recent articles. More...

More Resources for the Stocks in this Article