Option Trade of The Day: Taiwan Semiconductor (TSM)

One of the most interesting “smart money” trades we came across yesterday was with Taiwan Semiconductor Mfg. Co. Ltd. (NYSE: TSM).

If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:

  1. Which direction the trader thinks the stock is headed
  2. How much they think it will rise (or fall), and
  3. In what time frame this will all happen.

If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…

A Pro Trader Just Bet $16,575,000 that TSM Will Continue to Climb in the Next 4 Months

On Thursday, January 13, 2022, a pro trader seems to have bought 5,000 of the May 20, 2022, $110 call options on TSM for $33.15 per contract. Her outlay was $16,575,000.

TSM – Option Trade

The trade’s breakeven point is at $143.15, meaning that TSM needs to rise to $143.15 for the call option trade to break even. This is a nearly 3% upside from the stock’s previous close of $139.19. And then for every $1 the stock rises above $143.15, our “smart money” trader will make $500,000!

On analyzing the weekly chart of TSM, the stock seems to have broken out of a flag pattern, which is marked as blue color lines. This makes it likely our pro trader is bullish on TSM.

TSM – Weekly Chart

This lends credence to our conclusion that the pro bought these call options, as opposed to selling them.

If you agree and would like to mimic this trade, here’s how:

Buy to open the May 20, 2022, $110 call options on TSM for $33.15 or better.

As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.

Happy Trading!

— Trades of The Day Research Team

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