Sell Semiconductor Puts for Full Profits

by Tyler Craig | December 12, 2012 1:27 pm

The beleaguered tech sector finally showed some signs of life in Tuesday’s trading session. In fact, of the nine major Select Sector SPDR exchange-traded funds, the Technology Select Sector SPDR (NYSE:XLK[1]) was the top performer, rising 1.35% on the day.

While traders should be cautious in reading too much into any one day’s performance, the return of tech leadership is certainly a welcome development. The tech space is one of the premier offensive sectors that should lead — or at least exhibit relative strength — during a bull market.

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Interestingly, while the broader tech sector has lagged until yesterday, the semiconductor industry has been stealthily outperforming. The strength in semis accelerated this week, driving the Market Vectors Semiconductor ETF (NYSE:SMH[2]) to break above a key intermediate resistance level and the 200-day moving average on high volume to boot. Tuesday’s semi surge was led by Texas Instruments (NASDAQ:TXN[3]), which established a key breakout of its own, lifting the stock 3.9%.

Since semiconductors are widely viewed as a leading industry, their continued strength should bode well for the overall market. The recent run in SMH has left it a bit extended in the short-term, though. A pullback or some consolidation would allow the ETF to digest its recent gains and set the stage for a continuation of its nascent uptrend.

Traders looking for bullish exposure to SMH could sell the January 32 puts for 60 cents or better. The max reward is limited to the initial credit received and will be captured if SMH remains above $32 by Jan expiration. To minimize the risk, traders could buy back the puts to close the position if SMH falls below support at $31.75.

In the event SMH does pull back in the coming days, traders might be able to sell the Jan 32 puts for a higher credit, such as 70 or 80 cents.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. XLK:
  2. SMH:
  3. TXN:

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