Taiwan Semiconductor is eyeing a 205.63 cup-with-handle buy point and is above its rising 21-, 50- and 200-day moving averages. But what if you're looking to reduce your risk on the trade or think that Taiwan Semiconductor stock could continue this handle a little longer? The bull put spread limits the profit potential but it also limits your risk. Plus, you don't even need the stock to go up in order to make money.
Taiwan Semiconductor Stock Today
TSM is the world's largest contract chipmaker, producing advanced semiconductors for clients like Apple, Nvidia and Advanced Micro Devices.
While Nvidia is trading below its 50-day line, Taiwan Semiconductor is in a much stronger position. Traders looking for a more conservative way to play TSM stock using options can use the bull put spread.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Taiwan Semiconductor trades sideways or higher and even sometimes if it trades slightly lower.
Traders who think Taiwan Semiconductor will stay above its 50-day moving average line for the next few weeks could sell a 190-185 bull put spread for around 1.55 using the Jan. 17 expiration. That spread sells a put at 190 and buys a put at 185 for protection in case Tawain Semiconductor falls more than expected. Since the sold put is closer to at-the-money than the long put, this spread will bring in credit of $155.
The option trader gets to keep that entire credit if Taiwan Semiconductor stays above 190 by the Jan. 17 expiration. If the stock finishes below 185 at the expiration, that will lead to the maximum loss of $345. That's simply the distance of the strikes less the premium received, then multiplied by 100. The break-even price is 188.45.
Profits And Losses
When you collect premium as an option seller, generally you want the options to expire worthless so you keep the full premium. If this spread expires worthless that would be a 44% return in four weeks, provided Taiwan Semiconductor stock is above 190 at expiration.
If Taiwan Semiconductor starts falling to its 50-day line, you don't have to wait until expiration and the possibility of taking the maximum loss. You could set a stop loss either based on the stock hitting a certain price level or if the spread value starts rising sharply. Simply reverse the process and buy the 190 put and sell the 185 put to close the trade.
Exiting the position if you are at a loss equal to the premium received, in this case $155, is a good rule of thumb to keep losses even smaller for credit spreads.
The break-even point for the trade is 188.45, which is calculated as 190 less the 1.55 option premium per contract.
Leadership In Its Group
According to IBD Stock Checkup, Taiwan Semiconductor stock ranks No. 1 in its group and has a Composite Rating of 97, an EPS Rating of 98 and a Relative Strength Rating of 90.
Taiwan Semiconductor has already reported earnings, so this trade should not have any earnings risk.
When implied volatility is low historically for stocks, we'll usually use more debit spreads instead of credit spreads. This bull call spread on Marvell Technologies is working well and could potentially be closed early for a nice and quick profit.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
