Semiconductor stocks have given investors a wild ride so far in 2018, especially since U.S. chip makers rely on global supply chai🔜ns with particular exposure to Asia. Trade tensions with China have been a major source of anxiety among investors even as chip stocks initially rose as both governments took steps to avoid a trade war. Despite talks of a truce over the weekend, recent comments by President Trump on Tuesday have heightened China-U.S. trade tensions, rendering a hedging investing strategy even more important. No matter what the outcome of these unpredictable trade talks, Credit Suisse has outlined a strategy by which investors can profit from further upside in chip stocks while limiting the downside, .

Applied Materials Inc. (AMAT) is a prime example of how volatile these stocks can be. This leading supplier of capital equipment for chip production saw its share price plunge by more than 8% on May 18, following lowered projections of revenue and earnings for the current quarter, . Meanwhile, analysis of options trading indicates that Micron Technology Inc. (MU) and Nvidia Corp. (NVDA) are expected by investors to be among the most volatile stocks in the 澳洲幸运5官方开奖结果体彩网:S&P 500 Index (SPX) during the next month, per data from Trade Alert cited by Barron's. (For more, see also: 澳洲幸运5官方开🎃奖结果体彩网:Are Redꦅ-Hot Semiconductor Stocks Top Heavy?)

Rollercoaster Ride

Based on closing prices, the iShares PHLX Semiconductor ETF (SOXX) fell to a year-to-date loss of nearly 3% on February 8, then jumped to a peak YTD gain of almost 16% on March 12, per Yahoo Finan🐠ce. Since then, after a series of wide swings, including a revisiting of negative territory, the ETF closed on May 18 with a YTD gain of roughly 8%. The index gained on Monday. By comparison, the ཧS&P 500 was up by 2% YTD.

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Hedging Strategy

Mandy Xu, a derivatives strategist at Credit Suisse, proposed a set of options trades using the VanEck Vectors Semiconductor ETF (SMH) for investors who are optimistic about semiconductor stocks. It involves buying a 澳洲幸运5官方开奖结果体彩网:call option with a 澳洲幸运5官方开奖结果体彩网:strike price of $110 and selling a call option wi🌃th a strike price of $120. The Barron's article was pub🦩lished on May 17, at which time the VanEck ETF was trading at a value of around $106. It closed at $106.05 on May 21.

According to Xu, the trade would be most profitable if the ETF enjoys a 15% price gain over the next three months, which would place its value at around $122. If the ETF fails to reach a value of $110, the maximum loss that the investor can suffer would be equal to 澳洲幸运5官方开奖结果体彩网:net option premium paid, minus 澳洲幸运5官方开奖结果体彩网:transaction costs such as brokerage commissions.

Based on a measure known as skew, Credit Suisse finds, per Barron's, that the cost of hedging against a decline in the VanEck ETF is near its lowest level in a year. "That indicates that inv♐estors aren't paying up for protection," Barron's says, creating a situation that cautious investors can exploit.

The Case for Chip Stocks

The VanEck contains the 25 largest U.S.-listed semiconductor stocks by 澳洲幸运5官方开奖结果体彩网:market capitalization, while the SOXX consists of the 30 largest. Meanwhile, veteran tech fund manager Paul Wick has indicated that "semiconductors are an inexpensive way to play a lot of the best secular trends in technology." (For more, see also: 澳洲幸运5官方开奖结果体彩网:5 Stocks To Ride T♏he Hottest Tec🎶h Trends: Wick.)