September has arrived, a month historically associated with significant market corrections. In four of the past five years, the S & P 500 has experienced pullbacks ranging from 4% to 5% during this time. With major earnings reports behind us and no significant catalysts like Nvidia earnings to drive the market, I’m considering taking a bearish stance on the semiconductor sector by using the VanEck Semiconductor ETF (SMH) as a proxy for this trade. Looking at the 6-month daily chart below, it’s evident that SMH participated in the recovery rally in August. However, it has since faced rejection at a resistance level near $250 and is now forming lower highs and lower lows, signaling that the momentum from the relief rally is fading. The trade Given my bearish outlook, I’m utilizing a bear call spread, also known as a call credit spread here. The strategy involves selling a $247.50 call option, near the area of resistance SMH is encountering around the $250 level. To protect against potential upside risk and to define this trade’s risk parameters, I’m purchasing a $252.50 call option. The options chain for SMH shows 62% probability that the stock will remain below $247.5 at expiration, presenting a favorable chance for this trade to succeed. The trade generates a premium of $200, while the potential loss is limited to $300. Here is my exact trade setup: Sell $247.5 call, Sep 27th expiry Buy $252.5 call, Sep 27th expiry Credit: $200 (Values were as off 7am ET.) Provided SMH stays below $247.5 by the expiration date, this trade delivers a 66% ROI on the capital at risk. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading using Options and Technical Analysis Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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.
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