A chip stock hedge if the AI trend cools off a bit following Nvidia’s earnings
Nvidia’s earnings release is front and center this week as the beloved chipmaker should determine the short-term direction of U.S. equities. Led by the $2.3 trillion behemoth Nvidia (NVDA) , semiconductors have been on fire in 2024 after a dramatic outperformance in 2023. Artificial intelligence is a trendy theme, but I do believe it is due for a breather. I want to implement a hedge using the popular VanEck Semiconductor ETF (SMH) which has a near 21% weighting to Nvidia. NVDA SMH,.SPX YTD mountain Nvidia vs. Semi ETF vs. S & P 500, YTD The accelerated demand for AI is not a news flash and it created a parabolic move higher for Nvidia, moving the stock more than 500% higher since January 2023. However, I do have concern about the stock’s “over-ownership” and investors who have become conditioned to NVDA’s massive earnings beats. Nvidia reports after the bell Wednesday. What is “over-ownership” you ask? As of February 2024, over 500 different ETFs now own Nvidia. The largest ETF to hold NVDA is the SPDR S & P 500 ETF Trust (SPY) , with a 5.1% allocation or about $28 billion in market value. However, semiconductor ETFs and specialized AI themed ETFs have the highest exposure to NVDA by allocation percentage. My point in bringing up this potential “over-exposure” is that it can cut both ways. It can (and has) propel NVDA higher in a faster manner, but it also can amplify a move lower (if that is possible for the AI darling, NVDA). The trade I want to utilize (own) a put spread for two specific reasons. First, an investor can hedge exposure they may already have to NVDA without having to sell the underlying stock (potential tax event). Secondly, one can define their risk and profit in the event semiconductors (SMH) have a small 5% pullback after adding another 33% in 2024 gains after a monstrous 2023. The Bearish Semi Trade Buying a Put Spread in the VanEck Semiconductor ETF (SMH) Bought the SMH 6/28/24 $230 Put for $6.75 Sold the SMH 6/28/24 $210 Put for $1.65 Debit spread costing an investor $5.10 per one lot (or $510 per spread) In the event the put spread fills out and SMH trades below $210 before June 28, the profit is simply the $20 spread minus the $5.10 that you paid in premium to establish the hedge: $14.90 or $1,490 per one spread. Roughly a three-to-one risk/reward ratio. DISCLOSURES: (Long NVDA and this spread) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
