Editor Thenews24.net Following a significant surge in the stock market, I am preparing for more fluctuations, particularly in semiconductor stocks. This anticipated volatility prompts me to be cautious after large market movements, but I also see potential for notable shifts this month. I hold a pessimistic outlook on chip stocks, expecting the VanEck Semiconductor ETF (SMH) to experience continued downward pressure. SMH has seen a remarkable recovery over the past two weeks, hitting an intraday low of around $200 last Monday amid high volatility, and then reaching an intraday high of $247.34 just ten days later, closing near that peak on Thursday. This represents a significant rebound for this high-beta, leading ETF. However, I believe it is prudent to take profits on SMH if you are long, or to hedge against a potential pullback.
The Cboe Volatility Index (VIX) spiked above 65 at its intraday high last Monday, but has since plummeted by approximately 75%, now reading around 15. During this period of declining volatility, Nvidia (NVDA), which constitutes 21% of SMH, rebounded from $90 to nearly $125. For my bearish outlook to materialize in the coming weeks, Nvidia will need to retrace some of its gains. There is inherent risk, especially with Nvidia’s second-quarter earnings report due on August 28. This uncertainty underscores the need to manage risk, which is why I am opting to buy a put spread in SMH.
The Trade:
– Purchased the SMH $242.50 put (expiring 8/30/24) for $6.25
– Sold the SMH $232.50 put (expiring 8/30/24) for $3.00
This put spread costs $3.25, or $325 per one-lot spread. At the time of this trade, SMH was trading around $245.50. If the market continues to rise and Nvidia reports strong earnings, this trade will expire worthless. However, if SMH declines, this $10 spread could yield a profit of $675 per one-lot spread ($10 minus the $3.25 cost).
DISCLOSURES: (Long this spread) The opinions expressed by CNBC Pro contributors are their own and do not reflect the views of CNBC, NBC UNIVERSAL, their parent company, or affiliates. These opinions may have been previously shared on various media platforms. The content is subject to our terms and conditions and privacy policy and is provided for informational purposes only. It does not constitute financial, investment, tax, or legal advice, nor is it a recommendation to buy any security or financial asset. The content is general and does not consider individual circumstances. Before making financial decisions, you should seek advice from your own financial or investment advisor. Click here for the full disclaimer.