Is the 5G Boom Starting? A Huge Options Trade Thinks So

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Is the 5G Boom Starting? A Huge Options Trade Thinks So

Ever heard of 5G networking? One big options trader is looking for the next big thing in tech to drive a breakout in a major global chip stock.

Taiwan Semiconductor Manufacturing (TSM) is the world’s third-largest player after Intel (INTC) and Samsung. It’s rallying 3.5 percent today after beating estimates. A large bullish call spread is looking for the move to continue all the way into early next year:

  • 17,300 January 46 calls were bought for $1.65.
  • 17,300 January 50 calls were sold for $0.60.
  • Volume was more than 7 times open interest in both, which indicates new money was put to work.

Owning calls fixes the price where investors can buy shares. Selling them generates income and creates an obligation to deliver stock if a certain level is reached.

Investors can combine the orders into a spread. That uses the cash from the sale to reduce the cost of the contracts they buy. Lower cost means more leverage. (See our Knowledge Center.)

Taiwan Semiconductor (TSM) chart, with select moving averages.
Taiwan Semiconductor (TSM) chart, with select moving averages.

In the case of Thursday’s strategy, he or she lowered the cost to a net $1.05. They now stand to collect $4 if TSM closes at $50 on expiration in January. That would be a 281 percent profit from the shares rising just 17 percent.

Why 5G Is a Big Deal

5G, or fifth-generation, wireless networks will be 50-100 times faster than current services. That will make newer applications like cloud-based videogaming and smart buildings much more feasible. Analysts see the rollout costing more than $2 trillion over the next five years. (Trillion, not billion.)

TSM stands to capture some of that pie because it’s a contract manufacturer, providing chips for dozens of other companies making the equipment.

Another foreign chip company, Dutch equipment maker ASML (ASML), also said the 5G cycle is helping offset weakness in memory chips. Separately, Raymond James upgraded Apple (AAPL) on hopes of a 5G iPhone next year. That’s three bullish 5G stories in one day.

Overall options volume in TSM is about 15 times greater than the average over the last month. Calls account for a bullish 86 percent of the total.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.