How to hedge your winning chip trade if you nailed the AI rally

Published Fri, Mar 22 202410:57 AM EDT

New all-time highs were established (again) this week in the three major U.S. indices after the Federal Reserve signaled that three rate cuts are seemingly still on the table for 2024. This robust rally led by semiconductors (Nvidia and friends) seems unstoppable. However, I want to establish an insurance trade in the event chip stocks come up for a breather short-term or reverse some of this rally. SOXX .SPX 6M mountain iShares Semiconductor ETF (SOXX) vs. the S & P 500 The continued euphoria and associated demand for artificial intelligence semiconductors has boosted several chip stocks such as Nvidia, Broadcom and AMD. These three stocks alone are collectively up 150% on a one year look back and also make up nearly 25% of iShares Semiconductor ETF (SOXX) . Stocks globally continue to rally after Fed Chairman Jerome Powell presented a dovish outlook, insinuating that the Fed might initiate their rate cutting campaign despite their 2% goal not being achieved. In my nearly thirty years of trading experience, there have been several instances where the trajectory can remain intact, but the overzealous trading environment presents opportunity for a counterintuitive approach. In the event a protective play does not work out, an investor's continued exposure to the underlying stock or ETF has the ability to offset the cost of the "insurance" trade. The Trade Buying a put spread on the iShares Semiconductor ETF: Bought the April regular expiration $220 put (4/19/24) for $4.50 Sold the April regular expiration $205 put (4/19/24) for $1.15 This is a debit spread (typical when buying a put spread) that will cost an investor $3.35 per one spread established. That translates to $335 per one spread It is important to remember that you do not always have to be right when buying a put spread due to the long exposure you already have in either the single stock security or in this case the ETF. In the event you do not have any exposure to the semiconductor space, this trade would simply be a speculative approach (with defined risk) to a slight pullback in semis. DISCLOSURES: (Long SOXX, Long this put spread) 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.