After completing a classic double bottom pattern in mid-July and leading the broader market higher, the semiconductor sector — via the Market Vectors Semiconductor ETF (NYSE:SMH) — has pulled back to a pivotal price level surrounding $33. (You can read about my earlier views on this tech heavyweight in Semiconductors Take a Leading Role.)
In the tomes of technical analysis, traders learn the concept of polarity, which states that former support levels turn into resistance and former resistance levels turn into support. Over the past few months, this $33 zone has provided support, then resistance, and now appears to be acting as support yet again.
Click to Enlarge If the uptrend in the semiconductor space is going to continue, the current retracement provides an alluring low risk-high/reward entry point. Traders with a natural inclination to sell options might consider selling the October 31 put for 55 cents or better. The cheap price tag of SMH will keep the margin requirement for the naked put to a minimum.
With a delta of 27, shorting the 31-strike put boasts a relatively high probability of profit at 73%. Provided SMH remains above $31 through October expiration, the put will expire worthless, allowing traders to capture the entire $55 profit.
On the off-chance that SMH breaches support and falls beneath $31 by October expiration, traders will be obligated to buy shares at $31. With the original 55 cents received at trade entry, the true cost basis is $30.45.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.