Semiconductors have been a big, profitable investment theme for investors in recent years, but it seems like a breather is imminent for this red-hot sector. With signs of profit taking in Nvidia (NVDA) this week for the first time since its post-earnings surge, it may be time to hedge against further declines in the semiconductor space. I like to use SMH (VanEck Semiconductor ETF) to represent my protective, bearish strategy. SMH SPY YTD pile VanEck Semiconductor ETF (SMH) vs SPDR S&P 500 ETF (SPY) – YTD To be clear, I remain optimistic about the semiconductor space and AI overall beyond 2024, but this parabolic move in these high-flying stocks has pushed many into overbought territory in May. If major chipmaker Nvidia decides to bury its stock back to around $950 before its May 22 earnings report, that 15% pullback will be a big weight on SMH, which is heavily weighted by Nvidia.Hard to believe, NVDA started 2024 trading below $500. Accelerating demand for artificial intelligence (AI) is not breaking news, it has created a parabolic rally that has sent Nvidia stock up over 500% since January 2023. However, I am concerned about the “overholding” of this stock and investors who have become accustomed to NVDA’s massive earnings overhang. NVDA YTD Mountain Nvidia (NVDA), YTD A protective trading strategy I like to execute is to define the upside risk while also trying to fund an entire options strategy that will be profitable if the semi actually falls. I also like to rely on technicals and utilize my favorite indicator (percentage from high) when trying to decipher whether a security’s short-term resistance is established. Trades Sell $247.50 SMH calls expiring 6/21/2024 for $5.00 Buy $255 SMH calls expiring 6/21/2024 for $2.40 Buy $230 SMH puts expiring 6/21/2024 for $2.10 Because I was able to set up this multi-leg position with a $0.50 credit, I would have made $50 per lot of this 3-leg spread. This strategy defines the potential loss on the upside if the Semi (aka NVDA) continues. However, if the Semi actually gets worse and investors lock in profits on NVDA, the darling of all AIs, the gains on the downside are unlimited. This also acts as a short-term hedge against any exposure to the AI theme. Disclosure: (Long SOXX ETF and this spread) Correction: The article had the SMH spread traded at the wrong value. These have been updated. The above content is subject to our Terms of Use and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect any individual’s unique circumstances. The content above may not be suitable for your particular situation. You should strongly consider seeking advice from your own financial or investment advisor before making any financial decisions. Click here for the full disclaimer.
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