Log in Open account
Singapore

What are your options - swing trading semi-conductors: stocks vs options

Equities
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.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    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...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    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...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    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 ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    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...
    Read full article
  • Equities: Are we blowing bubbles again

    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...
    Read full article
  • Macro: Sandcastle economics

    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...
    Read full article
  • Bonds: What to do until inflation stabilises

    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 ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    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...
    Read full article

Disclaimer

 The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore
Products & pricing
Platforms
Accounts & service
General
Other
Legal

Losses can exceed deposits on margin products. Please ensure you understand the risks.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.