There are few things in markets that are absolutely predictable, but one of them is that for most stocks, the majority of kurtosis occurs outside of market hours. The simple reason for this is because earnings announcements occur outside of market hours, and thus the largest swings in price that accompany them also occur outside of market hours. But in this obvious fact lies a less obvious one, the implied volatility of options will also follow this uncertainty and rise as the uncertain event approaches. In this case, our uncertain event is the earnings of a stock.
Our last earnings based play was a long strangle on Nvidia which was quite fortuitous until the implied volatility crush that occurred at earnings. But, the call options we recommended appreciated so much and we recommended a two for one position, that you could have sold one and gotten a completely free peak at Nvidia earnings.
Or, of course, you could have taken the money and run before the event at a significant gain. The highest I clocked the trade was at 156%. The upside was limited by the put side of the trade. This time with $TSM I’m going more aggressive. Increasingly, analysts are giving hints that TSM could outperform even the high end of its optimistic guidance. The firm is one of the world’s indispensable company’s and is often in the position to name prices.
We’re doing a similar trade except not a strangle. We’re doing what your momma told you not to do, we’re getting a little naughty. I’m so confident in this company outperforming in this bull market environment, and leaving analyst expectations in the dust, that I’m going to recommend a straight OTM call option. That’s right. Spicy and simple.
I’m doing a similar trade here on a company whose fortune is quite indelibly tied to Nvidia, the Taiwan Semiconductor Corporation. I’m not going to spend too much time explaining how vital this company is to global commerce because if you’re on this site you should already know that. What I am going to explain is that I think this firm has several tailwinds:
The aggressive Fed cutting cycle means pressure on the valuation can be alleviated.
The increasing odds of a Kamala Harris victory means tensions with China should be relatively less than if Trump won.
In addition to lower tensions, a Harris victory leaves the Biden policy of unambiguously defending Taiwan in the case of a Chinese attack intact.
Economic weakness in China has directed international capital flows to other Asian markets, and Taiwan’s stock market will likely be a beneficiary of this trend.
I am a big fan of the company and I generally think a lot of the geopolitical risk around the firm materially dissipates in the event of a Harris victory. The true military situation is obscured by posturing on both sides, but when the CSIS war games it out, China loses every time when it tries to invade Taiwan. The logistical challenges with supplying an invasion force leave it doomed, if it is even able to get on the island. US military dominance remains intact, and Taiwan is a clever international actor that has ably stood up for its interests and protected its national treasure, the foundries upon which the digital age depends.
So, we are very bullish on this company and the market in general over the next few months. The Fed has cleared the way for the next leg of the bull market to begin and we think Taiwan Semiconductor will be at the vanguard of gains. It has beaten over the past four quarters, and I expect the firm will beat on its next earnings report in October based on the trend of revisions.
I think this firm is going to ride the seasonals into the end of the year quite nicely for the aforementioned reasons, and given the strength of market fundamentals, and the quality of this firm, I’m confident in recommending a pretty aggressive long position. I want to give it enough time value to take advantage of the full impact of positive seasonals, so I’ll be going out far enough to allow this trade to shine.
A big catalyst will be the earnings in October. For those who are risk averse, this may be an opportunity to sell if the stock experiences the usual runup in implied volatility that occurs before earnings reports. The usual implied volatility crush that happens afterward could be an opportunity to lower the cost basis on your contracts.
The firm certainly experiences some risks, and economic weakness in China could weigh on earnings, but I doubt it will counteract the strength of AI demand enough to dent earnings. This firm has repeatedly exceeded expectations and it is well diversified by geography and product type.
Overall, I expect the sector and the name to be primary beneficiaries of the bull market going forward. The rotation that has occurred has been healthy, but I think Semis will start working again as the bull market converges with the positive end-of-year seasonals.
Here is the trade:
Buy the January 17th 2025 $200 call options which are currently trading around $8.20. Given the scale of today’s rally in Technology you may want to wait until a tactical pullback to buy the contracts. I think you can probably grab them in the $7 handle tomorrow.
The earnings in October will be a major catalyst. It may be beneficial to set stops around this event, just in case. However, my analysis indicates that earnings in October will be fortuitous for the stock.
