On the eve of the second-quarter earnings report, $Taiwan Semiconductor Manufacturing(TSM)$ 's stock price has repeatedly hit new highs, with a market value exceeding 1 trillion US dollars on Monday.
According to forecasts from multiple Wall Street investment bank analysts, due to the ongoing tension in the global high-end wafer foundry situation, TSMC is expected to raise its full-year sales expectations in the financial report to be announced next week.
A report from Macquarie Securities points out that TSMC has learned through supply chain visits that most customers have agreed to an increase in foundry prices to ensure a stable supply, which will further drive up TSMC's gross margin.
Morgan Stanley, JPMorgan Chase, Nomura Holdings, and Mizuho Securities are all optimistic about TSMC's second-quarter performance, with Morgan Stanley raising its target price by 9%.
Data compiled by Bloomberg shows that the market currently expects TSMC's second-quarter revenue to grow by 35% year-on-year, the fastest growth rate since the fourth quarter of 2022.
The options market is betting that TSMC's post-earnings single-day price movement could reach 7.9%, with volatility likely to be slightly higher than the average in the past.
On average, the stock has moved by ±4.6% on the 12 past earnings announcement days, with a 67% probability of rising; in the most recent four earnings announcement days, TSMC stock closing at -5.1%, +3.7%, +9.8%, and -4.9% respectively.
Looking at the skew of option volatility, the current market is inclined to be bullish on $Taiwan Semiconductor Manufacturing(TSM)$.
For the upcoming TSMC earnings report, investors can consider an Iron Condor options strategy.
What is an Iron Condor strategy?
The Iron Condor strategy, composed of two call options and two put options, is used when investors predict that the stock price will fluctuate within a small range over a period of time, or when investors anticipate significant stock price volatility. This strategy has limited risk and limited profit potential. The strategy is named "Iron Condor" due to the shape of its profit and loss diagram, which resembles an eagle in flight.
The provided example outlines a Bear Iron Condor strategy for TSMC using options.
Here's a breakdown of the steps involved in setting up this strategy:
Sell a TSM put option with a strike price of $170 (expires on July 19th), and receive $140 (1.4 × $100).
Buy a TSM put option with a strike price of $162.5 (expires on July 19th), and pay $60 (0.6 × $100).
Sell a TSM call option with a strike price of $202.5 (expires on July 19th), and receive $258 (2.58 × $100).
Buy a TSM call option with a strike price of $210 (expires on July 19th), and pay $145 (1.29 × $100).
After completing the four option trades, the strategy is set up, and overall, a net premium of $241 is collected.
TSMC Stock Price | Put Option 170 | Put Option 162.5 | Call Option 202.5 | Call Option 210 | Net Profit/Loss |
|---|---|---|---|---|---|
< 162.5 | Expired | Exercised | Expired | Expired | Maximum Loss |
162.5 - 170 | Expired | Expired | Expired | Expired | $193 Profit |
170 - 202.5 | Expired | Expired | Expired | Expired | $193 Profit |
202.5 - 210 | Expired | Expired | Exercised | Expired | Loss |
> 210 | Expired | Expired | Exercised | Exercised | Maximum Loss |
If the $Taiwan Semiconductor Manufacturing(TSM)$ stock is between the strike prices of $170 and $202.5 at expiration, all options will expire worthless, and the trader will make a profit equal to the initial income. This is the maximum potential profit that the trade can offer, which in this example is $241
The current price of $Taiwan Semiconductor Manufacturing(TSM)$ is $186.63, with a downward fluctuation space of 8.91% and an upward fluctuation space of 8.5%. As long as the fluctuation stays within the range, the investor can earn all the profits.
Conversely, if the $Taiwan Semiconductor Manufacturing(TSM)$ stock price is greater than $210 or less than $162.5 at expiration, the maximum loss will be realized, but the loss is relatively limited, with the maximum loss being $557.
In this case, the Bear Iron Condor strategy is a bet that $Taiwan Semiconductor Manufacturing(TSM)$ 's stock price will not experience significant fluctuations. Statistically, significant stock price movements are indeed the exception rather than the rule, making the Iron Condor strategy a high-probability play for success. The Iron Condor strategy has a good chance of yielding small profits. Ideally, investors can set these strike prices far enough from the current stock price to make the probability of incurring the maximum loss sufficiently low.
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