The once overbought Nvidia-led tech rally seems to be losing its momentum. A bearish options hedge is being considered for a member of the chip sector that is displaying signs of a breakdown. The iShares Semiconductor ETF (SOXX) chart shows a significant bearish engulfing candle on March 8th, signaling a potential shift in direction for the semiconductor space. Stocks like Nvidia, AMD, and Broadcom are showing indications of a pullback, with Micron (MU) standing out as a notable example.
An examination of the 6-month daily chart of MU reveals several indicators pointing towards an impending trend reversal. The Relative Strength Index (RSI) has been used to assess weakness, with the RSI dipping below the overbought threshold of 70. Additionally, the price action in the chart shows a series of lower highs and lower lows, confirming the downtrend.
A “bear put spread” trade structure is being employed as a hedge against the potential downward movement in Micron. The specific trade setup involves buying a Micron $121 put with a May 3rd expiry and selling a Micron $120 put with the same expiry date. The trade has a cost of $50 with a potential profit of $50. The short expiry date of May 3rd has been chosen based on the quick results typically seen with bear put spreads within 14-21 days.
Risks and Considerations
While the bear put spread trade on Micron presents an opportunity for a 100% ROI if the stock moves in the desired direction by the expiration date, there are risks involved. The upcoming YTD Earnings season introduces uncertainty, with positive tech earnings releases posing a threat to the trade position. It is important to consider these factors before making any financial decisions.
The semiconductor sector is showing signs of a potential trend reversal, with Micron being a key stock to watch. The bear put spread trade setup outlined provides a strategic hedge against the expected downward movement in Micron. However, it is crucial to carefully assess the risks and market conditions before entering into any options trade. Investors should stay informed and consider seeking advice from financial advisors before making any investment decisions.