Taiwan Semiconductor is set to report earnings on Thursday before the opening bell and the options market is pricing in a 5.7% move in either direction.
Taiwan Semiconductor stock has moved higher following four of the last six earnings releases and only one of the last six has seen a bigger-than-expected move on the downside.
Today, we're looking at selling a cash-secured put to take advantage of the high implied volatility around the earnings announcement.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium. Or traders take assignment and acquire the stock below the current price.
They are very similar to a covered call and are quite easy to understand once you know the basics.
Risk Of Having To Buy 100 Shares
It's important that traders realize anyone selling puts may be assigned 100 shares at the strike price.
For Taiwan Semiconductor, a trader selling the Oct. 18 put with a strike price of 180 will generate around $170 in premium per contract.
The put has a delta of 16. That means there is an estimated 84% chance that it will expire worthless.
The put seller would have the obligation to purchase 100 shares at 180 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received. In this case, it's a break-even of 178.30.
That's 6.56% below Friday's closing price, and slightly outside the expected move.
Nearly 1% Return In A Few Days
If the stock stays above 180 at expiry, the put option expires worthless. That leaves the trader with a healthy 0.95% return on capital at risk. That works out to around 60% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put.
Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 0.95% return in a few days, or they get to purchase TSMC shares at a reasonable discount.
If Taiwan Semiconductor stock trades below 180 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, Taiwan Semiconductor is ranked No. 1 in its industry group. It has a Composite Rating of 95, an EPS Rating of 93 and a Relative Strength Rating of 94.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
