Semiconductor stocks went into orbit on Thursday on the back of better-than-expected earnings from an industry leader. The strength helped boost the Nasdaq to yet another record high and has the Street oozing with optimism. With the fresh momentum, I think the run in chip stocks could have legs. So today, I’m going to share three ways to capitalize.
If you think about it, there are two ways to respond to the boom. You either bet this was a blow-off top and chip stocks are due to retreat, or you wager we could see follow-through over the weeks ahead.
While I won’t argue with the short-term overbought conditions, any weakness must be viewed as a gift over the coming days.
In other words, I think the trend continues. Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) are extremely popular right now, but I find their share prices a little too hot. Instead of chasing them, consider shopping the following three companies:
After a brief look at each price chart, I’ll share my preferred path to profit.
Sizzling Semiconductor Stocks: Qualcomm (QCOM)
Qualcomm earnings provided the spark to Thursday’s bonfire. The company topped analyst estimates while also providing positive comments on the global chip shortage. As a result, QCOM stock rose nearly 13% overnight, lifting prices to a 10-month high. Volume exploded to 48 million shares, marking the most active trading session of 2021.
While the gap places prices in no-man’s land on the chart, I think the January high near $168 will serve as a magnet into year-end. We ended with a doji candle on Thursday, making it tricky to anticipate the next short-term move. Even if it’s lower, I think the robust fundamentals will bring buyers in relatively quickly.
In sum, I want to position ourselves for a run higher over the next two months.
The Trade: Buy the December $155/$165 bull call spread for $3.85.
With a $10 spread max value, you’re risking $3.85 to make $6.15.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor has been stuck in the mud for most of 2021, so I was pleased to see Qualcomm’s stock pop finally breathe some life into TSM. Shares were up 3.32% on heavy volume. The bump carried prices above short-term resistance at $117, clearing the way for a return to the top end of the range at $125.
Buying TSM here essentially amounts to a bet that the chip giant will play catch-up to the gains already being had in NVDA, AMD, and now QCOM. Accordingly, bull calls are once again my weapon of choice. The implied volatility rank of 14% and directional bias support the decision.
The Trade: Buy the December $120/$125 bull call spread for $1.50.
With a $5 spread max value, you’re risking $1.50 to make $3.50.
Sizzling Semiconductor Stocks: Applied Materials (AMAT)
The final pick for today’s semiconductor stocks to buy is Applied Materials. I found Thursday’s high volume breakout of its seven-month range too pretty to pass up. The pattern reminds me of what just happened in the Russell 2000 Index after finally departing its 10-month range. As technicians, we like to say, “the longer the base, the higher in space,” which suggests prices tend to rise rapidly after breaking out of long periods of consolidation.
One potential hiccup for AMAT stock over the near term is the earnings report scheduled for Nov. 18. That said, the past three announcements haven’t caused too much of a stir, so I’m betting the positive sentiment surrounding chip stocks will carry the day.
At 36%, the implied volatility rank for AMAT is higher than the previous two picks. This makes bull put spreads a viable option.
The Trade: Sell the December $130/$125 bull put for 55 cents.
You’re risking $4.45 to make 55 cents. To minimize the loss, consider exiting on a break of $130.
On the date of publication, Tyler Craig was LONG QCOM and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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