Some institutional investors bought a large volume of Taiwan Semiconductor (TSM) call options expiring in almost 9 months. The strike price is higher (i.e., out of the money), showing they are bullish on TSM American Depositary Receipts (ADRs).
TSM is at $447.04 in midday trading on Wednesday, Sept. 23. This is up from a recent trough of $413.75 in mid-month (Sept. 15), but still below a 3-month peak of $477.57 on June 30.
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TSM stock - last 3 months - Barchart - Sept. 23 The unusually heavy call option activity today is at a strike price of $490.00, which is 9.6% above today's price.
However, after factoring in the $45.80 paid for the call option, these investors expect TSM ADRs to rise to at least $535.80 for the call option to have any intrinsic value.
That's a bullish signal, as it means they expect TSM to spike almost 20% (i.e., +19.86%). The good news is that the call options have 267 days to expiry on June 17, 2027, or almost 9 months. That's plenty of time for this to happen.
TSM calls expiring June 17, 2027 - Barchart Unusual Stock Options Activity Report - Sept. 23, 2026 Moreover, the 5,400 call options represent over 28 times the prior number of call options outstanding. This is seen in today's Barchart Unusual Stock Options Activity Report.
Note that this can also be a bullish signal from sellers. For example, existing holders in TSM ADRs collect income of $45.80, which represents an 8+ month yield of over 10%:
$45.80 / $474.04 = 10.245%
Moreover, even if their shares are called away (if TSM rises to $490.00), they earn a realized gain of 9.6%. So, their total potential return is 19.86%. That's essentially a bullish signal as well.
The bottom line is that investors expect TSM to rise over this period. Even if investors in these calls are doing a spread play, this still implies a bullish sentiment.
By the way, institutional investors like doing this play. I wrote about a similar out-of-the-money call options play on July 28 ("Taiwan Semiconductor Has Unusual Call Options Activity - a High Covered Call Yield Play").
Higher Price Targets Lead to Expected Returns
Analysts have much higher price targets (PTs) for TSM ADRs. For example, Yahoo! Finance's survey of 21 analysts shows an average PT of $552.26, or over $105 higher or +23.5%.
Similarly, Barchart's mean survey PT is $514.14, implying 15% upside over the coming year. Stock Analysis shows a median PT of $538.50, +20.5%.
So, if TSM hits $538.50 in the next 6 months, the call options above will be at least $48.50 plus an extra amount due to extrinsic value:
$538.50 - $490.00 strike = $48.50 + 15% extrinsic value = $55.78
$48.50 +20% = $58.20
As a result, the investor has an expected return (ER) between 21.8% ($55.78/$45.8)and 27% (i.e., $58.20/$45.80). That's an average ER of 24.4%.
These are higher ERs than holding TSM shares (i.e., 20.5% to 23.5%). The investor can make a higher percentage gain with less capital, although the risk of loss is much higher.
The bottom line is that investors are bullish on TSM stock over the next 8 months to a year. Both buyers and sellers of these out-of-the-money calls expect to see TSM rise.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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