To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$ , the world’s largest semiconductor foundry, provides chip manufacturing and advanced packaging services to clients like $Apple(AAPL)$ and $NVIDIA Corp(NVDA)$ . This year, TSMC's stock has surged 85%. Since hitting a low on August 5, it has rebounded over 40%, and its market value is on track to surpass $1 trillion again.

Upcoming Earnings

TSMC will release its Q3 earnings on Thursday. Analysts expect revenue to reach NT$750.21 billion, a 37.22% year-on-year increase, with earnings per share at NT$56.8, up 36.4%.

In September, TSMC reported sales of NT$251.87 billion, exceeding expectations with a 39.6% year-on-year growth. For the year so far, total sales have reached NT$2.02585 trillion, a 31.9% increase from last year.

For the Q3, TSMC's revenue was NT$759.69 billion (approximately $23.62 billion), above analyst estimates of NT$750.36 billion (approximately $23.33 billion)and its own forecast.

Morgan Stanley suggests that due to strong demand for AI chips, TSMC's gross margin may rise slightly from 55% in Q3 to 55.5% in Q4. With successful price increases for wafers, TSMC aims to maintain a gross margin around 55% into 2025 and beyond, making its projected earnings per share increasingly attractive compared to other semiconductor companies.

Historically, the options market has overestimated TSMC's earnings volatility 67% of the time over the past 12 quarters. The average predicted volatility post-earnings is ±4.9%, while actual volatility averages 4.2%.

For the upcoming earnings announcement, investors might consider a straddle strategy.

What is a Straddle Strategy?

In a long straddle, investors buy both out-of-the-money call and put options. The call option's strike price is above the current market price, while the put option's strike price is below it. This strategy has significant profit potential, as the call can rise indefinitely if the stock price goes up, while the put can gain if the stock price drops. The risk is limited to the premiums paid for both options.

In a short straddle, investors sell both an out-of-the-money call and put option. This is a neutral strategy with limited profit potential, ideal when the stock trades within a narrow range. Maximum profit equals the premiums received from selling the options minus transaction costs.

1.TSMC Short Straddle Strategy Example

Currently, TSMC's stock is trading at $187.13. Investors can implement a short straddle strategy as follows:

Step 1: Sell a Call Option with strike price $200, premium received $107.

Step 2: Sell a Put Option with strike price $175, premium received $99.

2.Maximum Profit and Loss

- Maximum Profit: If TSMC's stock price remains between $175 and $200 at expiration. In this case, both options expire worthless, and the investor keeps the total premium received. The maximum profit would be $206 (total premium of $107 + $99).

- Maximum loss: The risk is theoretically unlimited. If the stock price moves significantly outside the $175 to $200 range, the investor could face substantial losses.

- Downside Risk: If the stock falls below $175, the investor will have to buy shares at $175, while the market price is lower. Potential loss would be calculated as =$175−Stock Price−$99 (put premium)

- Upside Risk: If the stock rises above $200, the investor will have to sell shares at $200 while the market price is higher. Potential loss would be = Stock Price−$200−$107 (call premium)

3. Break-Even Points

- Upper Break-Even: $200 + $107 = $307. Losses start if the stock price exceeds $307.

- Lower Break-Even: $175 - $99 = $76. Losses start if the stock price falls below $76.

Risk Summary

If TSMC’s stock price experiences significant volatility at expiration, particularly below $76 or above $307, the investor could incur considerable losses.