This post originally appeared on TradeStation Market Insights
Ever heard of 5G networking? One big options trader is looking for the next big thing in tech to drive a breakout in a major global chip stock.
Taiwan Semiconductor Manufacturing (NYSE: TSM) is the world’s third-largest player after Intel Corporation (NASDAQ: INTC) and Samsung. It’s rallying 3.5 percent today after beating estimates. A large bullish call spread is looking for the move to continue all the way into early next year:
- 17,300 January 46 calls were bought for $1.65.
- 17,300 January 50 calls were sold for $0.60.
- Volume was more than 7 times open interest in both, which indicates new money was put to work.
Owning calls fixes the price where investors can buy shares. Selling them generates income and creates an obligation to deliver stock if a certain level is reached.
Investors can combine the orders into a spread. That uses the cash from the sale to reduce the cost of the contracts they buy. Lower cost means more leverage. (See our Knowledge Center.)
Taiwan Semiconductor (TSM) chart, with select moving averages.
In the case of Thursday’s strategy, he or she lowered the cost to a net $1.05. They now stand to collect $4 if TSM closes at $50 on expiration in January. That would be a 281 percent profit from the shares rising just 17 percent.
Why 5G Is a Big Deal
5G, or fifth-generation, wireless networks will be 50-100 times faster than current services. That will make newer applications like cloud-based video gaming and smart buildings much more feasible. Analysts see the rollout costing more than $2 trillion over the next five years. (Trillion, not billion.)
TSM stands to capture some of that pie because it’s a contract manufacturer, providing chips for dozens of other companies making the equipment.
Another foreign chip company, Dutch equipment maker ASML Holding (NASDAQ: ASML), also said the 5G cycle is helping offset weakness in memory chips. Separately, Raymond James upgraded Apple Inc (NASDAQ: AAPL) on hopes of a 5G iPhone next year. That’s three bullish 5G stories in one day.
Overall options volume in TSM is about 15 times greater than the average over the last month. Calls account for a bullish 86 percent of the total.
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