Changing of the options guard

  • TSEM hit 22-month low last week amid canceled deal
  • Put OI still high, but recent volume dominated by calls
  • Large traders establishing vertical spreads?

On April 20, when chip stock Tower Semiconductor (TSEM) closed at $44.88, 9,300 contracts traded in both the October $43 and $37 put options. The October $43 closed at $4.07 that day, while the October $37 closed at $1.82.

It’s possible those same-size trades were a coincidence, but there’s also a chance they were part of a single position—namely, a vertical put spread. For example, a trader may have bought 9,300 of the $43 puts for $3,785,100 (using the day’s closing price for reference) while simultaneously selling 9,300 of the $37 puts for $1,692,600, creating a bear put spread at a net cost (and maximum risk) of $2,092,500. The position would have the potential to generate a profit if the stock moved lower, with the maximum gain at expiration peaking at the spread’s lower strike price ($37).

Flash forward to Tuesday afternoon: TSEM was trading just a little above $31, the October $43 put was trading at $12.65, and the October $37 was around $6.75. That represents a gain of $8.58 ($7,979,400) on the long $43 puts and a loss of $4.93 ($4,584,900) on the short $37 puts, for a net of $3,394,500 for a trader who bought a 9,300-contract put spread—or a $3,394,500 net loss for the other side of the trade.

Those are impressive numbers, and it’s an interesting trade scenario to consider in light of TSEM’s trajectory over the past 18 months. In February 2022 the stock jumped 42% in a single day after Intel (INTC) announced its plan to acquire TSEM for $5.4 billion:

Chart 1: Tower Semiconductor (TSEM), 1/18/22–8/22/23. Tower Semiconductor (TSEM) price chart. Stock falls as deal falls through.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The stock edged higher for a few weeks after the news, but the trend was to the downside after that. TSEM’s sell-off was particularly sharp after the stock rallied to new highs for this year in April—right around the time of the big put trades.

Whether or not that options activity specifically—and the stock’s decline in general—reflected skepticism about the deal, the other shoe finally dropped last week when Intel announced it was cancelling the acquisition, citing the inability of Chinese regulators to approve it by deadline.1 TSEM fell 11% on August 15 to its lowest level since October 2021 ($29.80).

Although the 9,300-contract October put positions were still open as of Tuesday, traders have been more active in TSEM calls in recent days. The stock appeared on the LiveAction scan for unusual call volume on Monday and Tuesday, when some large trades occurred in the January options:

Chart 2: Tower Semiconductor (TSEM) January calls, 8/22/23. Tower Semiconductor (TSEM) options chain. Bullish call spreads?

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

As was the case with the October puts, it’s impossible to know whether traders were establishing bull call spreads using the January $32 and $37 calls (600 contracts each) or the January $33 and $40 calls (2,000 contracts each). Also, because Tuesday’s volume was lower than the existing open interest (OI) in each of these contracts, it’s possible traders were scaling back positions rather than adding to them. Today’s OI should help clarify that point.

At the very least, though, traders appear to have shifted toward calls in the wake of the collapsed deal. Whether that trend will persist—and whether it reflects bullish sentiment—remains to be seen.

Market Mover Update: Discover Financial (DFS) fell more than 2.5% on Tuesday to close at its lowest price since February 2021 (see “Options traders engage near support”).

Today’s numbers include (all times ET): Mortgage Applications (7 a.m.), PMI Composite Flash (9:45 a.m.), New Home Sales (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Advance Auto Parts (AAP), Analog Devices (ADI), Dycom (DY), Foot Locker (FL), Kohl’s (KSS), Peloton (PTON), Williams Sonoma (WSM), Autodesk (ADSK), Nvidia (NVDA), Snowflake (SNOW), Splunk (SPLK).


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1 Reuters. Intel terminates plan to buy Tower Semiconductor. 8/16/23.

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