If You Have Some ‘Silly’ Money, United Microelectronics (UMC) Stock Is Worth a Look

United Microelectronics (UMC) is going to be a risky options trade. Although the foundry specialist — which provides services for high-performance semiconductor applications — is extremely relevant due to the artificial intelligence boom, it’s also a wild play. With UMC stock carrying a 60-month beta of 1.60, it’s significantly more volatile than the benchmark S&P 500.

Yes, fundamentally, United Microelectronics does enjoy a bullish argument. Recently, the company’s second-quarter earnings results saw revenue jump 17% on a year-over-year basis. In addition, gross margin expanded to 32.5%, reflecting substantially improved capacity utilization. Based on this context, it’s perhaps not surprising that UMC stock is up over 160% since its January opener.

Still, valuation concerns cloud United Microelectronics, though not as much as its semiconductor peers, to be fair. Also, it’s worth mentioning that Wall Street isn’t exactly gung-ho on UMC stock, currently rating the ticker as a Hold. Analysts apparently haven’t updated their consensus expectations so the average price target sits at a lowly $12.38.

Nevertheless, what’s intriguing here is the technical momentum. In the trailing month, United Microelectronics stock has gained roughly 10%. In the past week, the ticker jumped almost 9%. Personally, I’m not the biggest fan of chasing momentum. But because UMC is relatively more attractively priced than many other semiconductor plays, there’s a possibility that the enthusiasm could last for a few weeks.

In late June, UMC stock closed above the $28 level. While a return to that level may be unlikely, a more modest target of $22 could be possible. As such, if you have some “silly” money lying around, the 21/22 bull call spread expiring Sep. 18 may be a tempting proposition.

Low Odds for UMC Stock are Only Part of the Picture

With the above trade, you would be putting a net debit (cash outlay) of $50 at risk. Should United Microelectronics stock rise through the $22 second-leg strike at expiration, the maximum profit would be $50, a payout of 100%. That sounds straightforward but there’s a massive problem: this is a low-odds call spread.

Consider that the breakeven price for this transaction currently lands at $21.50. Right now, the probability of profit (breakeven) is only 34.3%. Making matters worse, if you reverse engineer Barchart’s Expected Move calculator, the odds that UMC stock will trigger the $22 strike at expiration are only 24.84%.

Basically, if you were to run this identical call spread across multiple parallel universes, you would only enjoy full profitability a quarter of a time. You’d only break even a little over a third of the time, meaning that the expected value (EV) of this trade will be very much negative. So, under a rational view, you’d either avoid the trade or only incur minimal exposure (i.e. silly money).

Before you search for another opportunity, though, you should be aware of how the above probabilities are calculated. Because options pricing mechanisms must provide a standardized framework for myriad derivative contracts, the underlying forward-risk calculation must utilize clinical, sanitary modeling. To achieve this directive, Wall Street assumes that securities will undergo a random walk from the current starting point to the target expiration date.

Now, I don’t think institutions genuinely believe that all securities will perform randomly, certainly not a high-beta ticker like United Microelectronics stock. That doesn’t necessarily mean that UMC will trade nonrandomly. However, in my opinion, a nonrandom journey is much more likely.

You just have to look at the mechanics of UMC stock. Here, you have a nominally “cheap” security that is obviously prone to the emotional peaks and valleys of the AI boom. That to me screams nonrandom.

Order Flow Imbalance May be the Kicker

What really makes me suspicious that United Microelectronics stock will deviate from the random walk assumption is UMC’s order flow imbalance. In the last 10 weeks, only three of the weekly candlesticks were positive, thus leading to an overall downward slope. When discretized into up/down sessions, you have a 3-7-D sequence (3 up weeks, 7 down weeks, downward slope).

I’m not suggesting that there’s anything inherently special about this quantitative sequence other than it being a static snapshot. But it’s what happens next following the flashing of this signal in the technical charts that makes it intriguing.

Unlike a balanced order flow, this particular sequence leans heavily toward the downside. We can reasonably assume, then, that at least some weak hands have been flushed out. Since there has been an extended downturn (at least in terms of the number of negative candlesticks), a temptation may exist for institutional traders to bid up the relative discount.

Indeed, we know through historical data going back to January 2019 that the above signal has flashed 29 times on a rolling basis. Of this tally, UMC stock has risen above the equivalent of the $22 strike price 10 times at the end of the third week (Sep. 18), leading to a probability of full profitability of 34.5%. The breakeven price of $21.50 has been reached 12 times or 41.4%.

Granted, these are not great probabilities. However, they’re noticeably better than the odds of 24.84% (to hit $22) and 34.3% (to hit $21.50). Will that be enough to convince speculators to consider this near-term trade for UMC stock? Honestly, most will probably still turn away. But for the extreme speculator, a nonrandom presupposition might add a little spice to the idea.