It has been anything but a level playing field for bulls in NXP Semiconductors (NASDAQ:NXPI) and Cypress Semiconductor (NASDAQ:CY) of late. But while bears can claim short-term victories, the opportunity to buy growth at a discount in these two semiconductor stocks is here today, and their prospects are made more attractive with a pair of well-designed options spreads.
Let me explain.
How to Trade Semiconductor Stocks Today
With more than a few semiconductor stocks like Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) or the VanEck Vectors Semiconductors ETF (NYSEARCA:SMH) trading at or near their intermediate highs, you’d think CY stock was selling chips for the handheld calculator market based on its correction the past couple months and flat 12-month performance.
Behind the weakness in CY, investors have grown increasingly concerned of a cyclical peak in NAND memory prices negatively impacting the company’s margins and profits going forward. But there are a few investors who see Wall Street’s current fearful mindset as an opportunity to buy the semiconductor stock at an attractive price when eyeing the long game.
Cypress’ niche embedded systems chips puts the company in a solid position to weather a more mainstream downturn in memory pricing due to its application in growth markets like IoT and autonomous autos. Cypress shares also sport an attractive valuation and there’s even a dividend that’s approaching 3% for a bit of added return. Furthermore, the pricing and CY’s business make this semiconductor stock an attractive buyout candidate.
Now there’s even supportive value on the long-term monthly Cypress price chart as CY stock tests some durable technical support. All told, it’s our view that it’s time to get married to Cypress shares, but without the potential for an extended hardship if conditions unexpectedly make a turn for the worse.
CY Stock Options Strategy
After reviewing Cypress’ options market, I’m favoring a married put strategy. This position buys CY stock and an equal ratio of put contracts below the market for protection. In case this new investment relationship proves to be a mistake, we won’t be paying for the error for years to come. But if we’re right and the semiconductor stock begins to rally, this position maintains theoretically unlimited upside.
With shares of CY at $14.40, the Dec $14 married put for $15.25 looks reasonable. Risk is capped at $1.25 or 8%. Further, with earnings are at the end of October, this position has time to take advantage of a potential bullish catalyst. And at the end of the day, that’s the sort of thing that can provide a solid platform for riding a profitable trend higher in the months and years ahead.
Now for a look at NXPI.
It hasn’t been entirely downhill for NXPI stock since Qualcomm (NASDAQ:QCOM) yanked its tumultuous and lengthy bid for the Dutch-based outfit in July. But as the price chart below reflects, it has been a volatile and unprofitable period for this semiconductor stock’s bullish investors. Worse, from NXPI’s February peak, a fairly common, but always painful corrective pullback of 32% has pinched shareholders even harder.
Much like with CY stock though, not everyone is convinced Wall Street has it right. CNBC’s James Cramer still sees multiple positive growth drivers for the company and cites NXPI stock’s big washout as a reason for investors to “Buy, Buy, Buy!”
With the semiconductor stock nearly 10% cheaper than when the Mad Money host defended shares, NXPI has a couple more price supports to back up a buy decision. With shares near $85, a challenge of NXPI’s 38% and 62% retracement levels based off cycle lows from 2010 and 2016 are in play. I’ve also taken the liberty of drawing in a supportive-looking channel based on monthly closing prices that is currently being tested.
NXPI Stock Options Strategy
Reviewing the options market for NXPI, I’m favoring the purchase of the Nov $90 / $95 call spread for this semiconductor stock. With shares at $85.08, this vertical is priced for $1.25.
The cost of this combination works out to having minimal stock exposure of about 1.50%, while owning the next earnings cycle in late October. That’s nice protection, especially if the price chart of this Dutch-based company begins to take on the look of a seller’s auction post-Tulip mania.
Joking aside, if we’re right and Cramer gets back to breaking even, this bull call spread will balloon to $5.00 for a profit of $3.75 or 300% with NXPI stock above $95 at expiration. That’s no laughing matter!
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.