Why There Might Be a Case for Taiwan Semiconductor Stock at $450 in September

Although Taiwan Semiconductor (TSM) easily ranks among the most relevant names in the market today, the journey forward hasn’t always been smooth. Yes, TSM stock is up over 40% on a year-to-date basis, a byproduct of its foundry business feeding virtually the entire global supply of advanced artificial-intelligence hardware. However, the ticker happens to be down roughly 11% since the end of June.

Still, many investors are optimistic about TSM stock for the underlying fundamentals, which may very well enjoy permanent relevance. Notably, despite the near-term choppiness, the Barchart Technical Opinion indicator rates TSM as a 72% Strong Buy. While there might be some turbulence, the overall picture appears enticing.

It’s no surprise, then, that Wall Street analysts are also aligned with the bullish proposition, with experts reaching a mean price target of $512.69. That’s a 12-month consensus view, which I believe is quite reasonable. However, for those who are feeling incredibly aggressive, there may be a case for Taiwan Semi stock reaching $450 next month.

Specifically, I’m looking at the 440/450 bull call spread expiring Sep. 18. For this trade to be fully profitable, TSM stock must rise through the $450 strike at expiration, which would trigger the maximum payout of 156.41% (at time of writing). Nominally, this transaction involves paying a net debit of $390 (which is the most that can be lost) to hopefully earn a max profit of $610.

Of course, with great reward comes great risk. Right now, the Street has issued a probability of only 35.2% that the above call spread will break even. Invert this figure and you’re looking at a potential failure rate of 64.8%. Adding to the skepticism, Taiwan Semi stock last breached the $450 level in late June.

Why then should traders believe that the tech ticker will rise more than 5.5% over the next five weeks?

TSM Stock May Encounter a Nonrandom Walk

When you dig deeper into the odds of success for the above Sep. 18 440/450 bull spread, the math gets even starker. If you reverse engineer the implications of TSM’s Expected Move calculator, you can effectively create a probability distribution screener. Under this framework, the chance that TSM stock can trigger the $450 strike at expiration is only 29.01%.

With odds that low, you’re talking about a crapshoot. As such, you must exercise extreme caution and robust risk management. Still, the less-appreciated fact is that because the future is unknown, everybody — you, me, the Wall Street big dogs — are all operating on presuppositions.

What’s a presup? Religious beliefs are a major example. No religion can be empirically tested because they’re making claims about the afterlife — which is scientifically an unknown domain. Therefore, one institution’s belief about the great beyond is just as good as any other. Ultimately, it’s up to you to decide which presup you find most convincing.

When it comes to Taiwan Semi stock, the underlying assumption is that the ticker will undergo a random walk from now until the expiration date. Assuming this random behavior, combined with the current implied volatility (IV) that is assumed to be static throughout the journey, the Street is anticipating only a small chance that TSM will trigger the $450 strike.

However, the nagging question is this: what if TSM stock were to undergo a nonrandom walk? It’s generally accepted among experts that the equities market is reflexive. Essentially, the market cannot be precisely determined because forward results fluctuate based on shifting circumstances. My theory is that order flow balance may trigger nonrandom reflexivity, thus allowing us to study prior trends to estimate forward trajectory.

In the case of TSM stock, the ticker printed only four up weeks over the last 10 weeks, yet the overall slope across the period was positive. This 4-6-U quantitative sequence suggests a structural contrarianism that may be exploited ahead of time.

Using an Inductive Approach to Strategize TSM Options

How can traders use past historical data to trade Taiwan Semi stock? One mechanism is through inductive analysis. By collecting the number of times the 4-6-U signal has materialized over a given period, we can then estimate what the median outcome may be over the future defined period. What we should discover is a variance between the control group (baseline) and the test group (signal).

That’s the basis for why I believe that TSM stock may reach $450 on Sep. 18. Whenever the aforementioned signal has flashed in the charts, the median endpoint at week 5 is a price level just shy of $450. In fact, out of the 21 times that the signal has materialized since January 2019, TSM has hit the equivalent of the $450 strike a total of 11 times at the end of week 5 (corresponding to the Sep. 18 expiration date).

Before you get too excited, there are two major risks to consider. First, the sample size is small so a high level of statistical confidence cannot be achieved. Second, inductive models are not guaranteed to produce the expected result. Just because a pattern has been established in the past does not necessarily mean it will repeat in the future.

That said, the future of a reflexive, non-determinative ecosystem can never be absolutely calculated with precision. Indeed, for anyone to capture a significant reward — such as a 156% payout — significant risks come with the territory. At the end of the day, Wall Street is pricing TSM stock options based on a random framework.

If we presuppose a nonrandom framework — and that’s neither right nor wrong — it’s possible that Taiwan Semiconductor could be favorably mispriced. That’s the gambit here and it’s up to you if you want to consider it.