To The Moon

TSMC Attracts Big Put Option Trades Ahead of Earnings, Locking in Gains From 62% Rally

$Taiwan Semiconductor Manufacturing(TSM)$   saw millions of dollars in block trades of put options that can shield their holders against a reversal of the American depositary receipts' (ADRs) 62% rally over the past year.

In the first half hour of trading Wednesday, four block trades were posted involving put options that give their holder the right to sell a combined 1.57 million ADRs of the Taiwanese chipmaker at $330 each in the next 37 days. That strike price is less than $2 below the all-time high of $331.77 reached Monday.

Those trades could help the buyers lock in gains or protect against volatility. The transactions were posted a day before the contract manufacturer that supplies almost all of the world's advanced AI chips was scheduled to report its financial results for the fourth quarter that ended in December. 

On Oct. 16, the ADRs slipped 1.6% even after the company surpassed analysts' average third quarter earnings estimate by more than 10%, the biggest positive surprise in two years. This time, TSMC's options market is implying a potential move up or down of 4.45%.

Analysts, on average, expect the company to report net income of NT$466.7 billion, up from the NT$374.7 billion it reported a year earlier, according to estimates compiled by Bloomberg. Operating margin was seen expanding to 50.9%, from 49% a year earlier. 

"We anticipate widening operating margin to ~50% in 2025-2026," CFRA analyst Alex Goh, who has a buy rating on the ADR, wrote in a note to clients last week. "We believe the markets underappreciate backend leverage and AI customer mix shift.”

At current prices, those $330 put options have 40% profit probability for the buyer. They have a maximum profit potential of $31,315 per contract and a maximum loss potential of $1,685. Each contract covers 100 shares. 

The contract manufacturer that supplies wafer fabrication for $NVIDIA(NVDA)$  's GPU architectures and chips for $Apple(AAPL)$  's iPhones, has benefited amid tight supply of chip on wafer on substrate with silicon interposer, known in the industry as CoWoS. 

That gives TSMC pricing power. While the rally meant the stock is now trading at more than 30X earnings, "record profitability, disciplined capex, and technology leadership support premium valuation," Goh said. 

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