Last week was another successful options selling week. ZM finished the week at $72.29 a share which was well above our strike of $68 a share. This brings our total return to 101.33% or $133.19 after three weeks of trading. Overall, pretty stable returns amidst challenging market conditions. This week's play is going to be a reaction to the recent US sanctions on China's semi-conductor industry.
According to CNBC, "On Friday, the U.S. Department of Commerce introduced sweeping rules aimed at cutting China off from obtaining or manufacturing key chips and components for supercomputers." With some estimating that China imports around 90% of its advanced chips from the United States, this is a major move against China and its advanced technology development. Essentially, China will have to build from scratch the most advanced manufacturing technology the world has ever seen. With a loss of such a crucial customer, I believe that semi-conductor stocks will further lose value this week. As such, we will be selling puts on the triple-inverse semi-conductor ETF SOXS. This ETF, managed by Direxion, aims to return -3% the daily return of the semi-conductor industry. What this means in theory is that, for every one percent increase in the semi-conductor industry, this ETF will LOSE 3% of value. So, given that it seems like the semi-conductor industry will take a hit due to the recent sanctions on China, this ETF will increase in value in the short-term. This is a perfect set-up for a weekly put selling strategy.
This trade carries with it an incredible amount of risk. To mitigate this, a further out of the money option should be selected. The further out of a money an option is, the lower the probability that the option will end in the money and the lower the delta. This week, we are going with the $60 strike option with a delta of -.06 and a probability of being in the money of 10.53%. For our put to be in the money this week, we would need SOXS to drop by $17.10 dollars or about 22%. This means that we need the semi-conductor industry to gain no-more than 7% this week to avoid assignment. Given that all of these assumptions are true, we can take home our premium of $39.34 after commission.
I hope you enjoyed this analysis and I will see you here next week! Happy trading!
-Vlad *This is not financial advice. Every investor should invest in companies and utilize strategies that maximize their financial goals within their personal risk tolerance. Trading options is a risky investment strategy.*
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