Semiconductors have been a massive and rewarding investment theme for investors in recent years, but a a breather in is this red-hot sector seems imminent. After the first sign this week of potential profit taking in Nvidia (NVDA) since it’s monster post-earning pop, now might be the time to hedge for further downside in the semiconductor space. I want to utilize SMH (VanEck Semiconductor ETF) to express my protective and bearish strategy. SMH SPY YTD mountain VanEck Semiconductor ETF (SMH) vs. SPDR S & P 500 ETF (SPY) – YTD For clarity, I am still optimistic on the semiconductor space and AI overall in 2024 and beyond, but this parabolic move in these high-flying stocks has pushed many stocks into overbought territory in the month of May. In the event leading chipmaker Nvidia decides to back-and-fill to where it just was before its May 22 earnings report release around $950, that 15% pull back would weigh heavily on SMH, where Nvidia has a massive weighting. It is hard to believe but NVDA kicked off 2024 trading under $500. The accelerated demand for artificial intelligence (AI) is not a news flash and it created a parabolic move higher for Nvidia moving the stock more than 500% higher since January 2023. However, I do have concern about the stock’s “over ownership” and investors who have become conditioned to NVDA’s massive earnings beats. NVDA YTD mountain Nvidia (NVDA), YTD What is “over ownership” you ask? As of February 2024, over 500 different ETFs now own Nvidia. The largest ETF to hold NVDA is the SPDR S & P 500 ETF Trust (SPY), which has almost 30 million shares, currently a 5.13% allocation or about $28 billion in market value, according to YCharts. However, semiconductor ETFs and specialized AI themed ETFs have the highest exposure to NVDA by allocation percentage. My point in bringing up this potential “over exposure” is that it can cut both ways, it can (and has) propel NVDA higher in a faster manner but, it also can amplify a move lower (if that is possible for the AI darling, NVDA). The trade I want to utilize (own) a put spread for two specific reasons. First, an investor can hedge exposure they may already have to NVDA without having to sell the underlying stock (potential tax event). Secondly, one can define their risk and profit in the event semiconductors (SMH) have a small 5% pullback. Buying a Put Spread in the VanEck Semiconductor ETF (SMH): Bought the SMH 6/28/24 $230 Put for $6.75 Sold the SMH 6/28/24 $210 Put for $1.65 Debit spread costing an investor $5.10 per one lot (or $510 per spread) In the event the put spread fills out and SMH trades below $210 before June 28, the profit is simply the $20 spread minus the $5.10 that you paid in premium to establish the hedge, $14.90 or $1,490 per one spread. Roughly a 3:1 risk/reward ratio. DISCLOSURES: (Long SOXX ETF and this spread) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
