Protect Your Portfolio With a Cheap Semiconductor Play

Get in before the rally fades

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This morning, I am recommending a bearish trade on Micron Technology, Inc. (NASDAQ:MU).

Last week, I talked about the uncertainty heading into the G20 summit. We weren’t sure if President Trump and President Xi would be able to agree to anything. That uncertainty probably contributed to the S&P 500’s retreat after hitting a new high last week.

The news from the Trump-Xi meeting turned out to be positive. The two leaders agreed to avoid imposing any more tariffs while the two countries try to reach a new trade agreement.

This news is bullish for the market, and it’s bullish for semiconductor stocks. So, why a bearish trade?

Monday’s Rally

After the positive trade news, the market opened at a new high, but as you can see from the 5-minute chart, the market did fade a little toward mid-day.

5-Minute Chart of the S&P 500 — Chart Source: TradingView

I believe the market’s expectations for this meeting were so low that the slightly positive news pushed the market higher. There is still a long way to go before we see a final trade deal, and it could all fall apart.

Semiconductor stocks have been hit particularly hard by the trade tensions, and the positive news from the G20 meeting sent the sector higher.

If we turn to the 5-minute chart for the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH), we can see that it too faded toward the end of the day.

5-Minute Chart of VanEck Vectors Semiconductor ETF (SMH) — Chart Source: TradingView

It’s entirely possible the market will continue its bullish move higher. SMH may even follow. But there is still a lot of uncertainty around trade. Rather than take on bullish exposure to semiconductor stocks, I want to use the rally to add some cheap downside insurance. That way, if trade talks stall or fall apart again, we can still collect a profit.

MU Might Struggle at $42

Turning to the daily chart for MU, we can see it is a good target for a downside play at its current levels. It struggled at just under the $42 level, which acted as support before the stock’s drop in May. A rejection at that level could push the stock lower if we don’t start to hear positive trade news soon.

Daily Chart of Micron Technology, Inc. (MU) — Chart Source: TradingView

With a put debit spread, we can take a bearish position on MU without risking much capital. Then, we can look for bullish trades in sectors that aren’t as vulnerable to trade news.

Using a spread order, buy to open the MU Sept. 20th $36 put and sell to open the MU Sept. 20th $33 put for a net debit of about $0.62.

Note: Be sure you are opening the monthly MU options that expire on Friday, Sept. 20, 2019.

About Put Debit Spreads

A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.

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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/protect-your-portfolio-with-a-cheap-semiconductor-play/.

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