How Options Traders Tripled Their Money on a Chip Stock

A TSM put option took advantage of the stock's weak technical setup

Managing Editor
Sep 28, 2022 at 1:16 PM
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Subscribers to our Schaeffer's Players Series service scored a 213% profit with our recommended Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) weekly 9/30 89-strike put in a little under a month. Below, we'll explain why we recommended the put in the first place, and how the trade played out so quickly. 

TSM Stock Postmortem

At the time of our recommendation on Wednesday, Aug. 17, TSM was below its -20% year-to-date level. Yet at the same time, the shares' 14-Day Relative Strength Index (RSI) was at an overbought condition in a bearish phase, indicating a next leg lower was possibly imminent. The stock was also failing at its descending 80-day moving average, per the chart above. This shorter term up-trendline was broken in early August and retested the previous peak. The $90 level was another sticky area, having served as both support and resistance in recent months.

There was a downgrade risk, too, considering four of the six brokerages in coverage rated TSM a "buy," with zero "sells" on the books. And among short sellers, short interest was up over 75% in the most recent one-month reporting period, another potential headwind for the tech stock.

Volatility was affordably priced too, per the shares' Schaeffer's Volatility Index (SVI) that ranked in the low 28% percentile of its annual range. We also noted the equity's Schaeffer's Volatility Scorecard (SVS) was sitting at a high 71 (out of 100), suggesting that TSM has, historically, delivered high returns for buyers. 

TSM was trading at $88.74 at the time of our recommendation. Although no bear notes came to fruition, the stock did carve a channel of lower lows, resulting in a 50% partial closeout on Sept. 1. After falling to a nearly two-year bottom of $72.36 on Sept. 27, we closed out the final 50% of the position, allowing subscribers to collect an overall profit of 213%, or more than triple their money. 

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