Trade the Best September Stocks with Options: Trade Idea on Taiwan Semiconductor

We have already done a bull call spread and a bull put spread on Microsoft shares in order to benefit from the historically positive development of this share in August. Both trade ideas were successful.

For the month of September, we would like to introduce you to the underlyings that, historically speaking, have shown robust performance in September and only in the rarest of cases recorded a manageable negative performance.

However, it is uncertain how the stock markets will generally perform in the coming weeks. Even a statistical advantage for individual stocks may not be sufficient when the markets go into correction mode. So caution is required at the moment.

In this article, we focus on strategies that would benefit from an upward move, but that could also cushion declines. Suitable solutions can be found with the right combination of options.

Stocks that performed very well in September

In this analysis we have filtered out the American stocks for you and put them through their paces, which meet the following conditions:

In the past 10 years, they have shown positive performance in at least 70% of the cases between September 1st and September 30th.
The average performance should be at least + 2%.
The worst performance could not show a loss of more than 7%.
The average daily trading volume of options on these underlyings should be at least 10,000 contracts.
In this analysis, we only consider underlyings that are traded on US stock exchanges, as these values ​​have the best tradability in options trading.

In the past, the average return on these underlyings was between 2.7% and 3.2% in September.

The worst price developments ranged from -6.70% to -4.50%, depending on the underlying. However, that does not mean that potential losses cannot be higher in the future. This should definitely be kept in mind when entering into trades based on this analysis.

We are considering Taiwan Semiconductor (US ticker: TSM) for a trade.

TSM’s historical average return of 2.7% in September is solid. The worst month had a loss of -4.5% that we as investors have to take into account. In the last 10 years, the share closed each September with a positive price development 8 times.

Incidentally, Taiwan Semiconductor will not publish any quarterly results in September.

The TSM share has been moving sideways since the beginning of March 2021. Historically, it gets a tailwind in September. The bull call spread presented here would benefit from an upward movement. The bull put spread presented here would benefit from a sideways or upward movement. But even a downward movement to the strike price of the put option sold would deliver the maximum profit for it. In other words, with the bull put spread, the stock doesn’t necessarily have to rise to make a profit.

Multiply the possible return with a bull call spread on TSM

As a strategy, bull call spreads are suitable for positions for which you have a clear target price in your sights. Bull call spreads are also attractive in that they have a limited risk of loss.

In our article “The Bull Call Spread: Earn disproportionately high with minimal use and rising prices” we explain all the mechanisms of the Bull Call Spread to you. In this context, the term “bull” stands for a strategy that relies on a rising base value.

First we need a target date for the life of the options. October 1, 2021 is a good expiration date, as it covers the entire trading month of September.

Our target course

Then we need a target course. At this point, we make the conservative assumption that TSM’s stock will only rise by around 1.5% by October 1, 2021. The strike price of the sold call should accordingly be close to the selected target price at which the bull call spread delivers the maximum profit. The base price of the purchased call is chosen under the current price.

TSM stock was trading at $ 118.49 at the time of this writing. We choose a short call with a strike price of $ 120. The strike price of the purchased call is $ 117, so the strike price of the calls brackets the current price. If the TSM share is already quoted higher or lower when the trade is entered, the next higher or lower strike price can be considered.

The trade will open on September 1, 2021 at the time the US stock exchanges open at 3:30 p.m.

The bull call spread as an option combination (long call and short call) is traded at an estimated $ 1.44 (mean price between bid and ask price) and costs $ 144 per contract (contract size: 100). This price can change very strongly depending on the fluctuations in the price of the TSM share every minute. In this case, the combination is cheaper than if you only bought the call with a strike price of $ 120 at around $ 2.72 (mean value between the ask and bid price) or $ 272 per contract.

“Limit” order and potential profits

When placing a buy order for a combination of options, be sure to place it as a limit order and try to get in at a favorable rate between the bid and ask price.

The maximum profit corresponds to the difference between the strike prices minus the amount paid for the combination of options: ($ 120 – $ 117) – $ 1.44 = $ 1.56 or $ 156 per contract. This maximum profit is achieved when TSM stock trades above $ 120 on the expiration date.

The maximum return on the bull call spread would be: $ 156 / $ 144 = 108%.

An early exit, if part of this return is on the books (for example 30% or 50%), can be considered.

But please note that these are only theoretical values. Should the TSM share not develop as forecast, there is a risk of loss at any time. You could lose the entire amount you wagered on buying the combination.

The maximum loss arises if the TSM share is quoted below $ 117 at the end of the term or below the base price of the selected purchased call on the day the trade is opened. Therefore, it is definitely advisable to also place a stop loss on the trade, for example at 30% or 50% of the stake.

The breakeven point

The breakeven point would be $ 118.44. If the TSM share is quoted above this at the end of the term, the bull call spread delivers a profit.

Compare this bull call spread to buying a simple call with a strike price of $ 120. The breakeven point for a simple call would be approximately $ 122.72. The TSM share must at least rise to this price to make up for the costs of the call. With a price of $ 120, the target price, the simple call would be worth nothing.

Cushion price drops with a bull put spread on TSM and still benefit

If you want to cushion a possible decline in the TSM share price without sacrificing a good return, a bull put spread is the best option.

As an example, consider a bull put spread with strike prices of $ 109 and $ 112, a premium of around $ 50 per contract and a term until October 1, 2021. The contract size of the TSM options is 100. This means that you would have to trade the bull put spread option combination (long put and short put) for at least $ 0.50 in order to collect the premium of $ 50. The premium itself offers a return of 20% (based on the margin). Although the return is lower than that of the bull call spread, it is still significantly higher than the average return of + 2.7% on the share itself. In addition, with the bull put spread you can partially reduce the share would cushion.

If the stock is quoted above $ 112 at the end of the term, the investor receives 100% of the premium as profit.

The maximum loss is $ 250 and occurs if the stock trades below $ 109 at the end of the term.

As with the bull call spread, the initial situation for this exemplary trade idea can quickly change radically, so that both the strike price and the premium should be adjusted to the current situation.

Principle of the bull put spread

A bull put spread is an alternative to a simple short put, in which the risk of loss and the capital invested are clearly limited. In addition to shorting a put option with a strike price of $ 112, buy a cheaper put option with a strike price of $ 109 to limit your risk if the stock falls. Due to the price difference between the two options, you will always receive a bonus (one credit) when you open this position. The bought put option protects you against higher losses in the event of a strong downward movement.

The plan will work if the TSM share closes above the strike price of $ 112 at the end of the term. In this case, the trade is over and you collect the $ 50 premium as a profit. At a current exchange rate of around $ 118.49, you have a safety cushion of 5.5% up to the base price of $ 112. The stock can fall by up to 5.5% by the expiration date without reducing the maximum profit (the premium). This safety cushion covers the worst price development of the last 10 years in a September month, as the TSM share lost a maximum of 4.50% in the last 10 years in September. A stop-loss is also recommended for this trade: if the stock falls below the strike price of $ 112, a cautious investor would consider an early exit from the position.

Premature profit-taking is possible at any time. To do this, simply smooth out the entire combination of options.

You can find out everything else about the topic of bull put spread in our article