It has become one of the most popular - and more recently, painful - trades among arbitrageurs on Wall Street: buying Taiwan Semiconductor Manufacturing Co’s (TSMC) lower-valued Taipei shares, and shorting the US stock on hopes prices will converge.

Goldman Sachs Group Inc is now highlighting a zero-cost alternative.

Investors can use options to bet that the premium on TSMC’s American depositary receipts (ADRs) - currently hovering between 20% and 25% - will shrink while capping their potential for losses if markets move the wrong way, according to a note from the bank’s trading desk on Wednesday. It advises buying puts on the US ticker and selling those on the Taiwan shares.

The artificial intelligence (AI) frenzy in the US has pushed TSMC’s ADRs to their highest average price since 2009 relative to the Taiwan shares this quarter. Traders are now waiting for the premium to revert back to its longer-term average. 

Goldman Sachs advises buying September 98% puts on the US ticker while selling at-the-money puts on the Taiwanese stock for a net-zero cost. Alternatively, investors could buy the ADRs’ September 97.3% puts, while selling 100% puts on the Taiwan shares denominated in US dollars. 

“The desk likes the put versus put trade, because it helps to significantly cap the max loss in a US tech/AI rally scenario,” the Goldman Sachs team wrote. The biggest risk associated with the cash implementation is that the ADRs “can keep riding up the AI momentum and so the spread has potential to further widen”.

Demand for options on TSMC’s ADRs has been on the rise as the US stock surged 73% this year to a peak. The contracts have also become pricier, with three-month implied volatility at its highest level since October 2022. At the same time, the ratio of bearish puts reached its highest level in almost two years relative to bullish calls, data compiled by Bloomberg showed. 

  - Bloomberg