Hey Trader,
Speaker of the House Nancy Pelosi isn’t the only one making moves on Taiwan …
Ahead of her arrival to the island on Tuesday, China issued a series of sharp warnings, and even conducted military exercises in the days leading up to her arrival.
So far, there’s been no major reaction out of Beijing …
However, Big Money was making some preparations of its own ahead of Pelosi’s contentious visit …
Here’s what Smart Money was watching.
Taiwan is home to some of the largest contract semiconductor companies in the world …
Most notably, Taiwan Semiconductor (Ticker: TSM).
Semiconductors as a whole struggled against headwinds for most of 2022, and especially in the days leading up to Pelosi’s visit.
Fears about potential conflict and escalating geopolitical tensions disrupting business weighed on the industry as a whole, and hit TSM and other Taiwan-based chip stocks extra hard.
After bottoming out in late June, TSM was finally starting to stage a bit of a comeback. The shares spent July mostly trending higher, though still well-off their early year highs above $140.
In recent days, TSM seemed unsure where to go next … and on Monday, the shares dropped 2.5% to close at $86.31.
Interestingly, note the sudden spike in 30-day implied volatility (IV, red line) in the days just ahead of Pelosi’s Taiwan trip:
In spite of the elevated IV, Big Money decided now was the time to make a move …
That’s a lot of put spreads …
This trader purchased a total of 24,000 August-dated 83-strike puts for $1.81-$1.98, and sold the same number of the 74-strike puts for $0.46-$0.51.
In total, these trades required a total outlay of $3,372,000, and actually appear to account for the majority of open interest in these contracts!
Now, with a block of bearish put spreads this large, one might assume Big Money is bearish on TSM, and is looking to capitalize on the downside.
That’s not entirely wrong … but instead of representing outright bearishness in Big Money, I think this trade was actually a hedge against event risk, which implied Big Money is actually long in TSM shares.
So while this trader is worried in the near-term … overall, they’re still bullish on TSM’s longer-term prospects.
Your Only Option,
Mark Sebastian