Taiwan Semiconductor (TSM) Booming as Chip Shortage Continues

TSM is in a sweet spot. It’s one of the few manufacturers of chips amid a worldwide shortage, especially in the automotive industry. TSM is a true manufacturer that provides chips to several semiconductor companies that have turned to outsourcing their production needs.

The stock is already up 25% this year as it rides along the support of its 20-day moving average. In fact, the stock has closed just one day below this trendline since early November. The shares pulled back this week but found support once again at the 20-day on Friday. With strong support and a full production pipeline, TSM seems unstoppable. And we’re entering a bullish position on a pullback.

TSM Chart February 2021

If you agree TSM’s rally will continue, consider the following trade that relies on the stock remaining above $135 through expiration in four weeks.

Buy to Open TSM 19MAR21 130 Put (TSM210319P130)
Sell to Open TSM 19MAR21 135 Put (TSM210319P135) for a credit of $2.00 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when TSM was trading near $137.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $198.70. This reduces your buying power by $500 and makes your investment $301.30 ($500 – $198.70).  If TSM closes above $135 on March 19, both options will expire worthless, and your return on the spread would be 66% ($198.70 / $301.30), or 857% annualized.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry