The narrative coming out of last week was that inflation has peaked, which could in turn slow down the Federal Reserve’s aggressive rate hike trajectory. A potentially less hawkish Fed helped spark a market rally as the S&P 500 gained 3.29%, the Dow rose 3%, and the Nasdaq added yet another 3.1%.

Cabot Profit Booster Issue: August 16, 2022

Market Overview
The narrative coming out of last week was that inflation has peaked, which could in turn slow down the Federal Reserve’s aggressive rate hike trajectory. A potentially less hawkish Fed helped spark a market rally as the S&P 500 gained 3.29%, the Dow rose 3%, and the Nasdaq added yet another 3.1%.

Of note, this Friday is the expiration of our August covered call positions. As usual, you can expect to hear from me where we stand with these trades Thursday afternoon or Friday morning.

This week we are adding an emerging star in the semiconductor sector …

The Stock – GlobalFoundries (GFS)
Why the Strength
A few weeks ago chip stocks looked toast—but today they look very peppy, and GlobalFoundries is a newly public name (the vast majority of shares are still owned by the investment firm of the United Arab Emirates, FYI) that made a run in April but, after falling back with the market, is perking up again.

The company is one of the five largest foundries in the world, with a specialty in making chips for firms that dominate the smart mobile market (making up about half of revenues; sales rose 14% in Q2), but also for things like communications/data centers (17% of revenue, up 50%) and home/industrial IoT (also 17% of revenue, up 72% in the latest quarter), all of which are growing nicely—due to both higher prices and growing output (production was up 6% sequentially in Q2).

Still, the attraction here is that GlobalFoundries has years worth of business lined up, as it’s busy expanding capacity in conjunction with long-term deals with major players. For instance, after the CHIPS act passed Congress recently (which, by the way, the top brass thinks could expand its already-solid margins), the firm extended a deal with Qualcomm by another $4 billion (totaling $7 billion through 2028) and inked a deal to jointly operate a new chip facility with ST Micro down the road; all told, it’s added $7 billion of long-term deals since its IPO last October ($27 billion total).

To be fair, analysts see earnings leveling off next year as chip prices may ease some, but (a) that’s almost surely conservative and (b) there’s little doubt the long-term picture here is great.

Technical Analysis
GFS looked bound for glory in March when it broke out during the market’s false rally, but it obviously wasn’t ready, with shares basically being cut in half after that. But as chip stocks have revved up, so has GFS—the stock has ramped higher six weeks in a row on growing volume, including last week’s big-volume push above resistance near 60 to multi-month highs. Stop — 51

The Covered Call Trade
Buy Global Foundries (GFS) Stock at 62.5, Sell to Open September 60 Strike Calls (exp. 9/16) for $5, or a Net Price of 57.5 or less

Static Return: $250 per covered call (4.34%)

Breakeven: 57.5

Covered Call Return (if assigned): $250 per covered call (4.34%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 57.5 or less. (In this case 62.5 minus 5 = 57.5. Or another example is you could pay 62 for the stock and sell the call for 4.50, which also equals 57.5)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on August 23, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.