Semiconductor ETF Booming Higher

Dear Reader,

On Friday, we looked at a Daily Price Chart of Merck & Co., Inc., noting that MRK’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.

For today’s Trade of the Day we will be looking at a Daily Price chart for the VanEck Vectors Semiconductor ETF, symbol: SMH.

Before breaking down SMH’s daily price chart let’s first review the investment objective of the ETF.

The SMH ETF invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor industry. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

Now, let’s begin to break down the Daily Price chart for SMH. Below is a Daily Price Chart with the price line displayed by an OHLC bar.

Buy the SMH ETF

The Daily Price chart above shows that SMH has been hitting new 52-Week Highs regularly since mid-May.

Simply put, an ETF does not just continually hit a series of new 52-Week Highs unless it is in a very strong bullish trend.

The Hughes Optioneering team looks for ETFs that are making a series of 52-Week Highs as this is a good indicator that the ETF is in a powerful uptrend.

You see, after an ETF makes a series of two or more 52-Week Highs, the ETF typically continues its price uptrend and should be purchased.

Our initial price target for the SMH ETF is 260.15 per share.

Profit if SMH is Up, Down, or Flat

Now, since the SMH ETF is currently making a series of new 52-Week Highs and will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for a SMH call option spread.

The Call Option Spread Calculator will calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in the SMH ETF at option expiration.

The goal of this example is to demonstrate the ‘built in’ profit potential for option spreads and the ability of spreads to profit if the underlying ETF is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike prices used in the profit/loss calculation.

The prices and returns represented below were calculated based on the current ETF and option pricing for SMH on 5/28/2024 before commissions.

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Built in Profit Potential

For this option spread, the calculator analysis below reveals the cost of the spread is $330 (circled). The maximum risk for an option spread is the cost of the spread.

The analysis reveals that if the SMH ETF is flat or up at all at expiration the spread will realize a 51.5% return (circled).

And if the SMH ETF decreases 7.5% at option expiration, the option spread would make a 51.5% return (circled).

Due to option pricing characteristics, this option spread has a ‘built in’ 51.5% profit potential when the trade was identified*.

Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.

A higher percentage of winning trades can give you the discipline needed to become a successful trader.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

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Wishing You the Best in Investing Success,