Taiwan Semiconductor Bull Put Spread Could Return 12% in 2 Weeks

Taiwan Semiconductor (TSM) put in a bullish candle yesterday and closed back above the 21-day moving average.

The Barchart Technical Opinion rating is a 40% Buy with an average short-term outlook on maintaining the current direction.

TSM rates as a Strong Buy according to 4 analysts with 1 Moderate Buy rating and 2 Hold ratings.

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.

Today, we’re going to look at a bull put spread trade. 

A bull put spread is a bullish trade that also can benefit from a drop in implied volatility.

The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

TSM BULL PUT SPREAD

Implied volatility is currently sitting at 36.80% which gives TSM and IV Percentile of 57% and an IV Rank of 32.82%.

Taiwan Semiconductor’s expected move between now and March 31 is around 5.71% in either direction. On the downside, that would put TSM stock at around 84.

In other words, the options market is expecting TSM stock to stay above 84 between now and March 31.

To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.

Selling the March 31 put with a strike price of 84 and buying the 79 put would create a bull put spread.

This spread was trading yesterday for around $0.54. That means a trader selling this spread would receive $54 in option premium and would have a maximum risk of $446.

That represents a 12.1% return on risk between now and March 31 if TSM stock remains above 84.

If TSM stock closes below 79 on the expiration date the trade loses the full $446.

The breakeven point for the bull put spread is 83.46 which is calculated as 84 less the 0.54 option premium per contract.

Conclusion And Risk Management

One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $54, so we could set a stop loss equal to the premium received, or a loss of around $54.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 85-86.

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.

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