Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
What are your options - swing trading semi-conductors: stocks vs options
Koen Hoorelbeke
Investment and Options Strategist
Summary: Explore the efficiencies of swing trading semi-conductors using options versus stocks, with a detailed comparison using the VanEck Semiconductor ETF in light of NVIDIA's upcoming earnings release.
Swing trading semi-conductors: stocks vs options
Introduction:
In this exploration, we'll examine a specific trade setup for the VanEck Semiconductor ETF. This week, NVIDIA (NVDA) is set to release their quarterly earnings, an event that could cause significant movement in the semiconductor sector. By setting up a trade on an ETF in which NVIDIA is a constituent, traders might find a less direct and potentially less volatile way to engage with the potential price movements of NVIDIA.
Swing trading is a trading strategy that aims to capture short- to medium-term price movements. Traditionally, swing traders have utilized stocks/etfs to capitalize on these movements. However, options present a compelling alternative, offering unique advantages and considerations. In this article we'll have a look how this compares with a "conventional" swing trade, using stocks/etfs, while examining one specific case in which we're looking at how to set up a trade when we have a bullish outlook on the underlying (SMH). (quick reminder: we, Saxo, are not bullish nor bearish on SMH, we use this case to illustrate and learn the difference between the different asset-classes).
We've chosen the bullish put credit spread as our representative options strategy to contrast with conventional stock trading. It's worth noting that the world of options is vast and diverse. While we focus on the bullish put credit spread here, there are numerous other strategies one could employ for swing trading with options, such as simply buying a call, initiating a call debit spread, selling a naked put, and many more. This article aims to provide a glimpse into the versatility and potential of options in the context of swing trading, using our chosen strategy as a starting point.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Bullish put credit spread
A bullish put credit spread is an options strategy that involves selling a put option while simultaneously buying another put option at a lower strike price. This strategy benefits if the underlying stock remains above the sold put's strike price by expiration. The maximum profit is the premium received from the sold option, and the maximum potential loss is the difference between the two strike prices minus the received premium.
Buying the stock/etf
Buying the stock/etf simply involves purchasing shares of the underlying asset. This strategy profits if the stock/etf price appreciates. The potential profit is unlimited as it's directly tied to any rise in the stock's price. However, the maximum loss is equivalent to the amount invested, as it would occur if the stock's/etf's price went to $0. In this specific use case, we'll consider a "take profit" ($170) and a "stop loss" ($130), where we'll set a limit on the "unlimited" aspects of the stock/etf trades. This is a much more realistic approach then just saying "unlimited".
Comparison table:
Characteristic | Bullish Put Credit Spread | Buying the Stock/Etf |
|---|---|---|
Maximum Profit | Premium received | Unlimited |
Maximum Loss | Difference between strike prices - premium received | Amount invested |
Risk | Limited | Potential for larger losses with significant price drops |
Profit Potential | Limited to the premium received | Unlimited |
Time Decay (Theta) | Benefits from time decay | Not applicable |
Dividends and Voting Rights | none | Entitled to dividends and voting rights |
Complexity | Moderate due to multi-leg nature | Simple |
Comparing real numbers: 100 shares vs. 9 bullish put credit spreads
To provide a meaningful comparison between buying 100 shares and the bullish put credit spread strategy, it's essential to equate the exposure of both positions. One of the key factors that determine the exposure of an options position is the delta. The delta of an option indicates how much the option's price is expected to change for a one-dollar movement in the underlying stock.
For our chosen bullish put credit spread strategy, the delta is 0.1105. To achieve a similar exposure to holding 100 shares of the stock, we can calculate the number of contracts needed by dividing 1 by the delta, which gives us 9.04. Rounding down, we arrive at 9 contracts. By trading 9 contracts of this spread, we create an options position with a delta roughly equivalent to that of the stock, ensuring the position will rise (or fall) approximately dollar for dollar with the underlying stock.
Comparison table with real numbers:
| Characteristic | Bullish Put Credit Spread | Buying the Stock |
|---|---|---|
| Position Details | Sell to Open SMH Put 15-sep-2023 strike 140 | Buy to Open SMH 100 @ $145 |
| Initial Capital/Investment | $2,900.49 (Margin requirement) | $14,500 (invested) |
| Maximum Profit | $1,305 | $2,500 (Based on Take Profit of $170) |
| Maximum Profit % | 44.99% | 17.24% |
| Maximum Loss | $3,195 | $1,500 (Based on Stop Loss of $130) |
| Risk | Limited to $3,195 | Limited to $1,500 based on the stop-loss |
| Profit Potential (% of Initial) | 45% (of the margin requirement) | 17.2% (based on the take profit) |
| Dividends and Voting Rights | none | Entitled to dividends and voting rights |
| Complexity | Moderate | Simple |
Conclusion:
Swing trading with options, such as the bullish put credit spread, provides traders with the flexibility to utilize capital more efficiently, often requiring less initial investment compared to direct stock trading. This efficiency doesn't necessarily mean sacrificing potential returns, as the right options strategy can provide significant profit opportunities relative to the capital employed.
While the bullish put credit spread has a defined maximum loss, it is crucial to note that this loss can be managed, similar to setting a stop loss in stock trading. On the other hand, directly trading the underlying stock typically demands a more substantial initial capital outlay. And while we've incorporated a stop loss to manage risk in our stock trading example, without this protective measure, potential losses can be much larger, especially in the face of unexpected market events.
Both approaches have their merits and potential drawbacks. The choice between them should be based on individual trading goals, risk tolerance, and the specific market outlook. It's always essential to be well-informed and to consider multiple strategies and risk-management techniques in the ever-evolving world of trading.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer