Long VanEck Semiconductor ETF (SMH): Top Trade Opportunities

Supply chain issues plagued the semiconductor space starting in 2020 and continuing into this year. The semiconductor stocks however seemed unphased as the VanEck Semiconductor ETF (SMH) rallied to an eye watering all time high of $318.82 on November 22nd of 2021. Unsurprisingly, SMH fell along with the broader tech sector at the start of 2022, with the downtrend worsening as war broke out in Ukraine. SMH now sits at $272, 15% off of the November highs but 14% off of the recent $237.32 low.

For longer term investors, SMH is a good potential fund for those seeking to add a concentrated semiconductor investment, but don’t know which stock they wish to own. SMH holds a basket of 25 semiconductor stocks, with Taiwan Semiconductor (TSM) and Nvidia (NVDA) each making up about 10% of the overall ETF.

SMH can also work as a trading vehicle for options traders. Liquidity in most near-term expirations is respectable, with hundreds or thousands of contracts in open interest, depending on the strike. The bid-ask spreads for the options can be a little wider than some of the sector or equity index ETFs so traders must be patient with when attempting to fill spreads in SMH.

With the recent price action in SMH, I’m looking to place a “Jade Lizard” options strategy for the May expiration. A Jade Lizard combines a short put with a short call spread (selling a call and buying a further away call). Because the strategy collects $5.10, which is more than the width of the call spread, $5, there is no theoretical risk to the upside if SMH keeps running. I would simply keep the $0.10 ($10 per lot) if SMH rallies above $295.

If the ETF price falls below $230, I would be obligated to purchase 100 shares. I am comfortable with this risk given SMH’s low for 2022 was over $237. Additionally, the cost basis on those shares would be $224.90 thanks to the $5.10 credit received for the strategy.