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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:


CharacteristicBullish Put Credit SpreadBuying the Stock
Position Details

Sell to Open SMH Put 15-sep-2023 strike 140
Buy to Open SMH Put 15-sep-2023 strike 135

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
(9*500-1305)

$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

Please note: The figures in the comparison table are illustrative and don't account for potential commissions, taxes, or other applicable costs.
 

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.
©barchart.com
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.

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