To The Moon

The highlight of earnings season is here: TSMC reports on Thursday (July 16). This post takes you from fundamentals, volatility calculations, and large order signals all the way to strategy positioning for three scenarios — a complete guide on how to trade earnings without stepping on landmines.

Part 1: Fundamentals — What Is the Market Watching?

TSMC is a company that reports monthly results, so revenue and profit are public information that has largely been priced into the stock price well in advance. Market expectations for this report are very high: full-year revenue guidance is expected to be raised to 40%, gross margin above 67%, 2026 capex raised to $56 billion, with total capex over 2026–2028 expected to reach $206 billion.

The two most closely watched metrics are gross margin and capex — these will tell us whether AI demand in data centers is slowing, and how much longer this growth cycle can continue.

Part 2: Calculating Volatility — What Has the Market Already Priced In?

Using Monday's pre-market price of 434 as a baseline, and deriving from ATM options, this week's implied price move is approximately ±6.39%, corresponding to a range of roughly 406–462. That's your baseline: only an actual move beyond this counts as a truly big move.

Morgan Stanley's expectations: 60% probability of a 1–3% upside (AI demand remains strong through 2028); 20% probability of a bearish scenario — if revenue/gross margin miss expectations (rising storage costs eating into AI demand), the stock could fall 3–5%.

ASML's earnings on Wednesday showed strong demand, with another upward revision to full-year guidance and clear outlook on Low-NA EUV capacity for 2027 and 2028 (85 units in 2027, up to 110 in 2028). Given that TSMC is ASML's largest EUV equipment customer, TSMC's report theoretically shouldn't be too weak, aligning with the 60% high-probability scenario — a post-earnings plunge is unlikely.

Part 3: Large Order Signals — What Are Institutions Thinking?

We noticed an interesting trade: an existing bullish call spread expiring August 21 (long 480 Call / short 560 Call) was closed and rolled to September 18 expiry, changing to long 450 Call / short 530 Call, with 17,000 contracts on each leg.

From these two actions — extending the expiry by one month and lowering the strike prices — we can infer that the trader isn't strongly confident in an upside move from this report, and expects some sideways consolidation after earnings, hence the roll-out and roll-down. This also supports the view that range-bound trading is the highest-probability scenario.

Part 4: Strategy Positioning for 3 Scenarios

The overarching theme: the expected moves across all three scenarios (1–5%) do not "far exceed" the market's priced-in ±6.39%. Therefore, buying options outright will most likely underperform due to IV Crush. Spreads (using a short leg to hedge IV Crush) and deep in-the-money options (resistant to IV Crush) offer better risk-reward.

Scenario 1: 60% Probability of 1–3% Upside (→ roughly 428–437)

This is a small move / near sideways — the actual move is smaller than what the market has priced in. Buyers lose, sellers win — let IV Crush work for you:

• Top pick: Sell Put (sell OTM put) — sell the 395 $TSM 20260717 395.0 PUT$  or 385 Put$TSM 20260717 385.0 PUT$  . Mildly bullish: as long as it doesn't drop significantly, you profit; post-earnings IV collapse causes the Put to depreciate quickly — direction + IV Crush work together in your favor.

• Advanced: Bull Put Spread — sell 400 Put $TSM 20260717 400.0 PUT$ + buy 395 Put$TSM 20260717 395.0 PUT$  . Collect premium, cap maximum loss. Suitable for those who think it "most likely won't fall" but still want to control risk.

• Not recommended: Buying ATM Call outright. A small move plus IV Crush means you could lose even if you get the direction right.

Scenario 2: 20% Probability of 3–5% Upside (→ roughly 437–445)

A larger upside move, approaching the upper bound of 462 but still within expected range — clear bullish bias:

• Top pick: Bull Call Spread — buy 425 (ATM) or 430 Call + sell 470 Call. The long leg captures the upside, the short leg recovers some premium and hedges part of the IV Crush — lower cost, better risk-reward, with profit capped at 470, aligning with the possibility of a move to 450.

• Conservative: Buy deep ITM Call — buy 380 or 390 Call (Delta ≈ 0.9). Moves almost tick-for-tick with the stock, most resistant to IV Crush, allowing you to capture 3–5% gains steadily. The trade-off: higher cost, lower leverage — and if you're wrong on direction, you lose the full premium.

• Not recommended: Buying OTM Call outright. At 3–5%, the move doesn't far exceed expectations — IV Crush will still eat into your returns.

Scenario 3: 20% Probability of 3–5% Downside (→ roughly 400–410)

Corresponds to the bearish scenario (gross margin / demand miss) — bearish direction, with the decline within the expected range:

• Top pick: Bear Put Spread — buy 420 Put + sell 395 Put. The long leg captures the downside, the short leg recovers premium and hedges IV Crush — lower cost, defined risk, ideal if you expect a decline to the 400–410 area.

• Conservative: Buy deep ITM Put — buy 450 Put (Delta ≈ −0.9). Tracks the downside, resists IV Crush, steady. The trade-off: higher cost — and if you're wrong on direction, you lose the full premium.

• Not recommended: Buying OTM Put outright. The decline doesn't far exceed expectations — IV Crush will eat into your profits.

Part 5: When to Close — The Most Critical Part of Earnings Trading

Close at the open immediately after earnings, regardless of direction — especially for strategies that profit from IV Crush (sellers and spreads). What you're supposed to capture (direction + volatility collapse) gets fully reflected within moments of the open. Don't get greedy, don't let sideways churn eat away at your profits — this aligns with the signal from the large order flow that the stock may trade sideways after earnings.

⚠️ The above is for educational and illustrative purposes only. All strike prices and numbers shown are hypothetical and for demonstration only. This does not constitute investment advice. Earnings are high-risk events; buyers may lose their entire premium, and sellers may face even greater risks. Please ensure you practice proper risk management.