Taiwan Semiconductor Manufacturing Company Limited (TSM) is trending in news and social media as investors brace for an earnings report due this Thursday before the market opens. Implied volatility expectations are high due to the uncertainty around the earnings announcement.

TSM is the world’s largest contract chip manufacturer. Their customers include companies like Apple (AAPL) and Nvidia (NVDA). Analysts expect the earnings to report as much as a 40% growth in AI chip demand, according to Reuters.

The hype around earnings on trending stocks can cause huge volatility expectations that tend to collapse when the reports are made public. We want to use a strategy that benefits from the huge expectations and a potentially huge move in the stock price after earnings are made public. 

This Volatility Term Structure  chart for TSM shows that volatility expectations for October 18th expiration are extremely high as investors anticipate a big move after the earnings announcement on Thursday. In this situation, we want to use a strategy that includes selling expensive options.

This MDM graph  compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of TSM’s share prices over the past year (the blue histogram). You can see that the actual stock movement does not look like the modeled expectations. This graph tells us that expectations are extreme. Investors expect much larger moves than TSM shares have actually made in the past year. Options prices are expensive compared to this stock’s past behavior.

This Volatility Skew  chart for TSM compares implied volatility expectations for each strike price at Friday’s expiration. The steep skew allows us to sell an expensive option and use the proceeds to buy 2 less expensive options in a strategy called a ratio back spread. This effectively lets us create a neutral strategy while letting someone else pay for the position.

TSM is trending in the news and social media. Volatility expectations for Friday’s option expiration are extremely high as uncertainty around Thursday’s scheduled earnings report gets factored into options prices. There is a steep volatility skew that lets us take a neutral approach for the earnings play while letting someone else pay for the position.

To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback