TSMC Attracts $190 Million Bullish Call Option Trade as ADRs Rise

$Taiwan Semiconductor Manufacturing(TSM)$   attracted a $190 million bullish call option trade after the Taiwanese company that supplies almost all of the world's advanced AI chips including those for $NVIDIA(NVDA)$   saw its American depositary receipts head higher, defying a tech sell-off. 

The ADRs advanced after the semiconductor company was reported to be accelerating its plans to adopt cutting edge technology, boosting its total investment in the southern Japanese plant to $17 billion, according to a Yomiuri report. 

The plan “helps reduce the risk of oversupply as customers migrate faster to advanced processes for AI applications,” Bloomberg Intelligence analyst Steven Tseng wrote in a note Thursday. “The move better aligns capacity with demand from AI servers, autonomous driving and robotics, while leveraging Japan's strengths in materials and equipment.”

TSMC earlier planned for that facility in Kumamoto, Japan to be able to make 7-nanometer chips. With the upgrade, it will be able to start producing the more advanced 3-nanometer chips by late 2027, according to the news report.

An active buyer paid a $45.79 premium per ADRs for call options that give their holder the right to purchase 4.15 million TSMC ADRs at $300 each in the next 98 days. That transaction was 17.7X the open interest, signaling that it could be a new position.

The purchase could be a sign of the buyer's optimism that TSMC will keep rising. At current implied volatility, those call options would only be profitable for the buyer if the ADRs climb above the breakeven level of $350.38, from its current level of $331.23, before they expire on May 15. 

That part of a multi-leg transaction has a profit probability of 37.75%. If the ADRs keep climbing, that trade has an unlimited maximum profit potential. If the prices tank, it carries a maximum loss potential of $5,037.50 per contract, which is composed of 100 ADRs.

The multi-leg transaction was posted at the exact time that an active seller sold $159.32 million of call options that give their holder the right to buy the same number of TSMC ADRs at $290 each by Feb. 20. Given that the sale was slightly smaller than the open interest, it could be just an institutional investor or large speculator closing out that position to roll it to a higher strike price with a longer expiration date. 

Strong demand for AI chips has helped TSMC protect its gains this year. The ADRs are still up almost 8.5% this year, outpacing the 7.4% advance for the $PHLX Semiconductor Index (.SOX.US)$. That contrasts with the 6.9% decline for its second biggest customer $NVIDIA (NVDA.US)$. $Apple (AAPL.US)$ is TSMC's biggest customer, according to data compiled by Bloomberg. 

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