Todd Gordon advises betting on Taiwan Semiconductor ahead of earnings.
The TradingAnalysis.com founder says Taiwan Semiconductor, the largest holding in the popular SMH semiconductor ETF, has a “pretty strong technical position” that makes it well-poised for a rally following its earnings report this Thursday.
While Taiwan Semi is in the middle of an uptrend, as shown in a chart Gordon provided, the trader is particularly interested in a “symmetry” that has also formed.
More specifically, back in late March when Taiwan Semi saw a pullback, it later bounced to new highs. The stock had pulled back from its all-time highs in July, and Gordon believes the trend will repeat itself.
“There’s obviously a trend, but the intervening pullback, so the corrections, to this trend are showing similarities,” he said Tuesday on CNBC’s “Trading Nation.” “When you find [symmetry like this], that tends to be a market that is showing a lot of volatility and a lot of opportunity.”
But since Taiwan Semiconductor is reporting earnings on Thursday, implied volatility, a major input into the price of options, is high. As a result, Gordon wants to sell options instead of buying options to take advantage of how expensive they are ahead of earnings. To determine his levels for the trade, Gordon looks to the uptrend line, which is sitting near $35, as he believes Taiwan Semi wouldn’t fall below that trendline.
Specifically, Gordon wants to sell the July 21 weekly 35-strike put and buy the July 21 weekly 34-strike put for a credit of 35 cents, or $35 per options spread. While he sees a maximum loss of $65 should Taiwan Semi close below $34 on July 21 expiration, Gordon believes his trade is highly likely to turn a profit.
“We have a skewed reward-to-risk ratio, but keep in mind we have a pretty good margin below us for support or for comfort before we start to hit a loss in the trade,” he explained. “We have a high probability of success.”
If Taiwan Semi were to close above $35, which it is currently above, on July 21 expiration, Gordon would make the $35 credit on the trade. But he would make money on the trade as long as the stock closes above the $34.65 breakeven level on expiration.
Taiwan Semiconductor is up about 23 percent year to date, outperforming the SMH as a whole, which is up 18 percent this year so far.