Whether we blame rising rates, supply chain issues, or the war in Ukraine, the semiconductor space has seen significant downside this year with SMH down 16% to end the first quarter of trading. The ETF is a basket of 26 stocks including TSM (-11%), NVDA (-11%), ASML (-16%), TXN (-5%), and AMD (-20%) as the top 5 holdings, all of which have seen significant downside to start the year.
SMH volatility remains high at around 40%, which is far greater than other broad based ETFs like SPY (23%) or even the more tech oriented QQQ (28%) and XLK (28%), and higher than the smaller cap ETFs like XRT (37%). SMH has also seen the greatest downside compared to SPY or QQQ, underperforming by ~10% and ~5% respectively. If you are bullish on the space, or think the selling may be overdone, one might look to sell naked puts into this heightened volatility.
Currently, the one standard deviation short put option trading around the 30 days till expiration mark are trading at a premium of $3.10 at a strike of 240 roughly ~10% out of the money given the ETFs current price of 265. Using around $2,700 in buying power per contract to hold the position, this put has the potential to yield a ~10% return on capital over the 30 day maturity if the ETF stays above the 240 mark, which would mark a low hit only once since July of 2021. If volatility remains high, this strategy could be implemented month over month as a way to remain long the semiconductor space at lower prices, while taking advantage of heighted premium.
YTD Percentage Change for SMH, SPY, QQQ, XRT, and XLK as of 3/23/2022
Written by Nick Battista, Host, tastytrade’s Option Trade Concepts LIVE!