Trading the Next Earnings Season for European Semiconductors

As the world has come to increasingly rely on smartphones, cloud computing, and artificial intelligence (AI), companies in the Semiconductor and Semiconductor Equipment industry have seen strong growth in revenues and earnings in recent years. Europe is home to over 50 different semiconductor companies, of which three of the largest have options listed[1] on Cboe Europe Derivatives Exchange (CEDX) – ASML Holding NV, ASM International NV and Infineon Technologies AG. All three managed to beat their 2024 Q1 analyst consensus estimates for GAAP EPS, and these same analysts report continued expectations of high earnings growth through at least 2026. Institutional investors and traders will now be considering different ways to capture the potential upside or downside move in these shares, depending on whether they expect these companies to continue beating the street versus breaking their streaks with a miss.

This article considers two simple option strategies that might be used to capture the next 10% upside or downside move in a stock over a time horizon spanning the next quarterly earnings report. For these hypothetical examples, we will price options on a fictional semiconductor company named “EuroChips”, which trades at €100 per share on 17 May 2024 and pays no dividend.

This company is scheduled to announce its 2024 Q2 earnings in two months, on 17 July 2024, and has listed options that expire two days after that on 19 July 2024. These two examples can be said to correspond to two over-simplified scenarios for EuroChips shares following its July earnings announcement: one that pushes its share price up to €110, versus the other which knocks it down to €90. These two scenarios can be efficiently captured with a call spread and a put spread respectively, as these two examples will illustrate. We assume a contract multiplier of 100, but sizes can vary and you should always check contract specifications prior to trading).

Bullish Call Spread: Capturing A Rise to €110

One strategy that efficiently captures a possible move from €100 to €110 is a “call spread”, which a trader puts together by buying the 100 strike call and selling the 110 strike call. With a 19 July expiry, two days and two months from the date the call spread is bought, this call spread may be entered for a net price of around €3.50, meaning the trader risks €350 in up-front capital per call spread in exchange for the following possible payouts at expiry:

1.   If EuroChips finishes at or above €110, the call spread pays out €1,000, or

2.   If EuroChips finishes at or below €100, the call spread expires worthless, or

3.   If EuroChips finishes between 100 and 110, each call spread expires worth €1 per every cent that EuroChips shares finish above €100.

In other words, this call spread requires EuroChips to rise to at least €103.50 in order to just break even on the premium paid, and caps out at a maximum profit of a little less than triple than the premium paid, but one key advantage is that the maximum loss is limited to the €350 paid per call spread, even if EuroChips falls significantly.

Bearish Put Spread: Getting Paid For Retracement Back to €90

 As a mirror image of the call spread trade, a put spread would efficiently capture a downside move from, for example, EuroChips’s current share price of €100 down to €90. For this example, we consider a put spread that involves buying a 100 strike put and selling the 90 strike put, again, both expiring on 19 July. As we assume positive interest rates and a typically negative volatility skew, this put spread may be available for a premium of €315, slightly cheaper than the call spread. This put spread offers the following payoff scenarios depending on where EuroChips closes on 19 July:

1.   If EuroChips finishes at or above €100, the put spread expires worthless, or

2.   If EuroChips finishes at or below €90, the put spread pays out its maximum value of €1,000, or

3.   If EuroChips finishes between €90 and €100, each put spread expires worth €1 per every cent that EuroChips shares finish below €100.

That the maximum loss on this put spread is limited to €315 per 100 shares of EuroChips may seem especially attractive when compared with the alternative of shorting EuroChips shares to try and profit from this expected decline, as the risk of being wrong on an outright short position is theoretically unlimited. This put spread also transfers any challenges and risks of having to borrow EuroChips shares from the put spread buyer to the put spread seller. 

Combinations and Conclusions

One advantage of options instruments is that traders can choose to combine or consider opposites or variants of any of these theoretical samples presented. For example, a trader who expects a big move in either direction, but not sure which direction, may consider buying both of the above spreads for a total cost of €665. This risks losing all €665 if EuroChips remains at exactly €100 at expiry, but for every cent EuroChips finishes above or below 100, this combination would be worth an additional €1 at expiry up to its maximum value of €1,000. On the other hand, a trader expecting EuroChips to remain within a tight range between now and July may prefer to sell both of these spreads and receive the €665 upfront, with the expectation of having to pay back less than this amount if EuroChips finishes above 93.35 or below 106.65.

Hopefully these examples start to make clear how precisely you can target specific moves and limit your risk when positioning your portfolio for any expected moves this next earnings season.

Learn more

Visit Cboe’s Options Institute to explore the basics of options trading: https://www.cboe.com/optionsinstitute

Cboe Europe offers trading in shares from across Europe and, through Cboe Europe Derivatives (CEDX), options are also available on shares in over 300 leading European companies.

Learn more about CEDX's equity options here: https://www.cboe.com/europe/derivatives/european-equity-options/

Disclaimers

·      The above is the product of external market analysis commissioned on behalf of Cboe Europe B.V. The views expressed herein are those of the author and do not necessarily reflect the views of Cboe Europe B.V., Cboe Global Markets, Inc. or any of its affiliates (‘Cboe’). For more information on how this research was conducted and/or the author please contact [email protected]

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·      Hypothetical scenarios are provided for illustrative purposes only. The actual performance of financial products can differ significantly from the performance of a hypothetical scenario due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences, and other considerations that may not be applicable to the hypothetical scenario.

·      Trading in options and options strategies can be complex and recommended for sophisticated investors with the appropriate level of knowledge and expertise in these transactions

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