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iShares PHLX Semiconductor ETF (SOXX) Trade Alert

By Jeff Brown on January 5, 2017

Action to Take:

Sell to Open the SOXX February 17, 2017 $115 put

Buy to Open the SOXX February 17, 2017 $110 put

For a net credit of $0.85 or more

Profit Potential:

Max capital at risk per spread: $415 ($500 − $85)

Return on capital at risk: $85/($500 − $85) = 20.5%

Days to expiration: 43

Trade Thesis:

Since the market lows in February of last year, the technology sector has been on a tear. The tech-heavy Nasdaq Composite Index has risen 28.7% in that time frame. It currently trades well above its 50-day moving average (as shown by the blue line below) and it continues to show strong price action.

One of the most critical components of the Nasdaq is the semiconductor industry. Semiconductors have been one of the major contributors to the Nasdaq’s rise over the last 12 months.

The chart below shows the iShares PHLX Semiconductor ETF (SOXX), which is the ETF for the Philadelphia Stock Exchange Semiconductor Sector Index.

SOXX has risen an incredible 63% since February of last year and shows just as much strength as the Nasdaq.

Trading now at about $123, it is well above its 50-day moving average (the blue line below) of about $117.

With current put premiums, we have an opportunity to put on a $115/$110 bull put spread with the short option strike price almost $3 below the 50-day moving average ($117.74) and well below the current trading price ($123.08). Better yet, we can generate a 20.5% return on capital at risk in a mere 43 days to expiration.

And taking this position is not contrary to our current bear call spread with Skyworks Solutions, another semiconductor company. Remember, our time frames are different. The Skyworks bear call spread expires on January 20 and the SOXX bull put spread is a February expiration. Also, Skyworks is a very sector-focused semiconductor play closely tied to the smartphone industry, which has been suffering from reduced volumes. This has placed a bit of a “cap” on companies like Skyworks.

SOXX is a broad-based, well-diversified semiconductor index that is representative of the entire semiconductor industry, which has been doing well in the last 12 months.

Action to Take:

Sell to Open the February 17, 2017 $115 put

Buy to Open the February 17, 2017 $110 put

For a net credit of $0.85 or more

Profit Potential:

Max capital at risk per spread: $415 ($500 − $85)

Return on capital at risk: $85/($500 − $85) = 20.5%

Days to expiration: 43

Questions About How to Place This Trade

If you need help placing this trade, take a look at our manifestohow-to guidebrokers manual, and Four Point Trader FAQ. Inside these reports, you’ll learn more about credit spreads, how to place these trades step by step, and how to find the right broker for you.

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