Semiconductors have been a massive and rewarding investment theme for investors in recent years, but a a breather in is this red-hot sector seems imminent. After the first sign this week of potential profit taking in Nvidia (NVDA) since it’s monster post-earning pop, now might be the time to hedge for further downside in the semiconductor space. I want to utilize SMH (VanEck Semiconductor ETF) to express my protective and bearish strategy. SMH SPY YTD mountain VanEck Semiconductor ETF (SMH) vs. SPDR S & P 500 ETF (SPY) – YTD For clarity, I am still optimistic on the semiconductor space and AI overall in 2024 and beyond, but this parabolic move in these high-flying stocks has pushed many stocks into overbought territory in the month of May. In the event leading chipmaker Nvidia decides to back-and-fill to where it just was before its May 22 earnings report release around $950, that 15% pull back would weigh heavily on SMH, where Nvidia has a massive weighting. It is hard to believe but NVDA kicked off 2024 trading under $500. The accelerated demand for artificial intelligence (AI) is not a news flash and it created a parabolic move higher for Nvidia moving the stock more than 500% higher since January 2023. However, I do have concern about the stock’s “over ownership” and investors who have become conditioned to NVDA’s massive earnings beats. NVDA YTD mountain Nvidia (NVDA), YTD The protective trade strategy I want to implement is to define upside risk while seeking to finance the whole option strategy which will profit if we indeed see Semi’s move lower. I want to lean on the technicals and also utilize a favored metric of mine (percentage off high) when trying to decipher if short-term resistance in a security has been established. The Trade Sold the $247.50 SMH Call expiring 6/21/2024 for $5.00 Bought the $255 SMH Call expiring 6/21/2024 for $2.40 Buy the $230 SMH Put expiring 6/21/2024 for $2.10 I was able to put this multi-leg position on for a $0.50 credit, meaning I collected $50 per one lot of this 3 legged spread. This strategy defines potential losses to the upside if Semi’s (aka NVDA) continue to run. However, profits are unlimited to the downside if Semi’s do indeed deteriorate and find investors booking profits in the AI darling of all AI darlingsâ¦NVDA. This also serves as a short-term hedge to any and all exposure you may have to the AI theme. DISCLOSURES: (Long SOXX ETF and this spread) Correction : The story gave the wrong trade values for the SMH spread. These have been updated. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
