July 1st, 2022
TSM Shares Making New Lows
Dear Reader,
Yesterday, we looked at a Monthly Price Chart of Walt Disney Co. noting the stock's 1-Month Price is trading below the 10-Month SMA signaling a 'Sell'.
For today's Trade of the Day we will be looking at a Daily Price chart for Taiwan Semiconductor Mfg. stock symbol: TSM.
Before breaking down TSM's daily price chart let's first review which products and services are offered by the company.
Taiwan Semiconductor Manufacturing Company Limited manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.
Now, let's begin to break down the Daily Price chart for TSM. Below is a Daily Price Chart with the price line displayed by an OHLC bar.
Sell TSM Stock
The Daily Price chart above shows that TSM stock has been hitting new 52-Week Lows regularly since mid-June.
Simply put, a stock does not just continually hit a series of new 52-Week Lows unless it is in a very strong bearish trend.
The Hughes Optioneering team looks for stocks that are making a series of 52-Week Lows as this is a good indicator that the stock is in a powerful downtrend.
You see, after a stock makes a series of two or more 52-Week Lows, the stock typically continues its price downtrend and bearish positions should be initiated.
Our initial price target for TSM stock is 73.60 per share.
85.4% Profit Potential for TSM Option
Now, since TSM shares are making a series of new 52-Week Lows this means the stock's bearish decline will likely continue. Let's use the Hughes Optioneering calculator to look at the potential returns for a TSM put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat TSM price to a 12.5% decrease.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following TSM option example, we used the 1% Rule to select the TSM option strike price but out of fairness to our paid option service subscribers we don't list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% Rule to select a TSM in-the-money option strike price, TSM stock only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if TSM stock is flat at 81.75 at option expiration, it will only result in a 1.6% loss for the TSM option compared to a 100% loss for an at-the-money or out-of-the-money put option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money put options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
The prices and returns represented below were calculated based on the current stock and option pricing for TSM on 6/30/2022 before commissions.
When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to move down in price.
For this specific put option, the calculator analysis below reveals if TSM stock decreases 5.0% at option expiration to 77.66 (circled), the put option would make 41.9% before commission.
If TSM stock decreases 10.0% at option expiration to 73.58 (circled), the put option would make 85.4% before commission and greatly outperform the stock return.
The leverage provided by put options allows you to maximize potential returns on bearish stocks.
The Hughes Optioneering Team is here to help you identify winning trades just like this one.
Interested in accessing the Optioneering Calculators? Join one of Chuck's Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.
Hughes Optioneering Strategies Perform In All Markets
This isn't Chuck's first bear market…
Over the past 20+ years, Chuck's strategies have proven to perform, even in the most volatile markets.
His strategies championed market corrections, the Dot-Com Crash, and the 2008 Great Recession.
This is your chance to gain access to his proven strategies and start receiving hand-picked trades from 10-Time Trading Champion!
Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code “Optioneering VIP” to receive special pricing.
You can also CLICK HERE to schedule a call!
Wishing You the Best in Investing Success,
Chuck Hughes
Editor, Trade of the Day
Have any questions? Email us at dailytrade@chuckstod.com
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