Options Corner: Taiwan Semiconductor's Trade Secret Dispute With Intel Presents A Contrarian Opportunity

Multinational chip contract manufacturing and design company Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM) — more commonly known as TSMC — suffered a noticeable decline on Tuesday. While the foundry giant is rapidly expanding its cutting-edge 2-nanometer facilities from seven to ten sites (obviously a direct impact from the dramatic demand surge of artificial intelligence), it has also attracted attention for a less-than-auspicious news item.

Part of the volatility that affected TSM stock on Tuesday may be due to a trade secrets dispute. According to a CNBC report, TSMC filed a lawsuit earlier today against a former senior vice president, accusing the individual of leaking confidential information to rival semiconductor player Intel Corp (NASDAQ:INTC).

Specifically, Wei-Jen Lo joined Intel after a 21-year tenure. Further, TSMC’s management team stated in its lawsuit that there is a “high probability that Lo uses, leaks, discloses, delivers, or transfers TSMC’s trade secrets and confidential information to Intel.”

Of course, what makes the issue so problematic for TSM stock is the underlying competitive effect. Effectively, TSMC is the undisputed foundry leader for advanced nodes used in AI chips. However, with the recent rise of Intel, the once-feared tech juggernaut could eventually threaten that position.

Still, it’s probably not worth panicking over the latest legal drama. For one thing, Intel still has many hurdles to climb. After years of misfires, misfortunes and various setbacks, Intel likely isn’t just going to match up mano a mano with TSMC.

Also, for what it’s worth, the latest options data suggests that market whales are more bullish than bearish on TSM stock. Granted, investors shouldn’t place too much weigh on a single day’s worth of options data due to the tremendous amount of white noise generated.

The more interesting detail is that TSM stock did incur a dip. This could present an intriguing contrarian opportunity for data-driven traders.

Using Data Science To Strategically Buy The TSM Stock Discount

As interesting as the trade secrets dispute is, it’s not really something that investors can trade. Naturally, once you’re reading about it on CNBC, whatever meaningful catalyst existed has more than likely been priced into the security. This dynamic also points to the flaw of fundamental analysis, which takes a singular event or journey and attempts to craft an entire narrative around of it.

Here’s the problem. Sometimes, the crafted narrative is proven correct. Other times, it is not. You simply have no idea what the probabilities are because you’re not dealing with empirical realities. Instead, you’re basing trades on rhetorical determinism.

Stepping beyond the deterministic paradigm of fundamental and technical analysis is quantitative analysis, which is the empirical study of price behaviors. However, I have decided to go a step further than most other quants by analyzing the structure of probability density.

Probability density refers to the likelihood, given many trials, of clustering effects at certain price levels. Unfortunately, density is a highly advanced topic and requires two basic elements: a dataset that is converted into an iterative format (many trials as opposed to a singular journey) and a bespoke algorithmic program to visually compute the probabilistic structures of a stock under specific circumstances.

While a detailed explanation extends well beyond the scope of any retail-facing financial publication, I’m using a Kolmogorov-Markov framework layered with kernel density estimations (KM-KDE) to generate the probabilistic data in my analysis.

Using the aforementioned KM-KDE approach, the forward 10-week median returns of TSM stock can be arranged as a distributional curve, with outcomes ranging between $272 and $312 (assuming an anchor price of $282). Further, price clustering would likely be predominant at $289.

The above assessment aggregates all trials or iterations since January 2019. However, we’re interested in a specific signal, the 4-6-U sequence; that is, in the trailing 10 weeks, TSM stock printed four up weeks and six down weeks, but with an overall upward slope.

Under this rare market condition, the forward 10-week returns would be expected to expand between $256 and $342. Put another way, while the risk tail extends unfavorably, the reward tail’s magnitude is noticeably greater. Moreover, the probability density’s mass is expected to be heavier on the positive side of the anchor price.

Most importantly, while primary clustering would likely occur at around $290 (and thus not much different from the baseline cluster), secondary clustering is heaviest at approximately $310. Combined with the probabilistic mass being greater on the positive side, the bullish proposition carries more weight.

Follow The Numbers, Not The Vibes

If you’ve come this far into the article, I hope you’ll realize that the live trading room videos that you see on social media — the kind where finance bros don gaming headsets and start yapping away about support and resistance lines — are a complete joke.

Yes, that’s a brutally blunt statement but here’s something you must take to heart: it takes zero skill or knowledge to draw lines on a chart. If a methodology has zero barriers to entry, it’s worthless. The reason why is that without a competitive moat, there is no edge.

In contrast, the edge that I’m bringing is the Kolmogorov-Markov process, which requires a bespoke algorithm that must be updated with an API account. It literally costs me money to bring this analysis to you.

With that said, I would take a long, hard look at the 290/300 bull call spread expiring Jan. 16, 2026. This trade requires two simultaneous transactions: buy the $290 call and sell the $300 call, for a net debit paid of $420 (the most that can be lost).

Should TSM stock rise through the second-leg strike ($300) at expiration, the maximum profit would be $580, a payout of over 138%. Further, breakeven would land at $294.20, which is quite close to the meatiest part of the 4-6-U sequence’s forward distributional curve.

Another factor that makes the 290/300 bull spread appealing is that the $300 strike is right in the middle of the two cluster zones. While it’s not guaranteed that TSM stock will end up there, the probabilistic mass is concentrated in that general area.

That’s how you use science, not vibes, to trade options.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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