A low cost way to bet on a breakout for this cheap AI play

As investors look for opportunities on the back of artificial intelligence, semiconductor companies have generated the lion's share of the revenue and earnings attributed to the booming trend so far. Here's an options trade betting on a breakout from an under the radar play in the chip industry.

The chip industry is the initial beneficiary because A.I. models and software require an exponential gain in computing power. And in these early stages of our A.I. revolution, inefficient use of computing power will disproportionately benefit semiconductor and cloud computing companies over software.

One semiconductor sub industry that stands out is fabrication, led by Applied Materials (AMAT) . As chip companies compete to build the most efficient and powerful chips, AMAT generates three quarters of its revenue from building the equipment for chip fabrication. The needs of computing and memory chips, specific for AI training is vastly different from general computing, which will likely see elevated demand for AMAT fabrication equipment and consulting services to upgrade existing processes.

Trading at only 19 times forward earnings, AMAT trades at a relative discount to its peers and industry. If we look at the chart, AMAT recently made an attempt to reach its all time highs at $167, but pulled back with the market at the start of the year. Despite this pullback, relative strength of AMAT has been strong and suggests that it may test its all time highs and potentially breakout higher above it in the coming weeks.

This pullback provides an opportunity to start establishing a position to play for the all time highs, and potentially add further exposure if it breaks out above its all time highs. Here is an opportunity to utilize options to potentially purchase the stock at a discount by selling a cash secured put.

I'm going out to the February expiration and sell the $150 puts at a $5.65 Credit. This would obligate me to buy the stock at a net price of $144.35 if AMAT is below $150 at the Feb. expiration, which would equate to a nearly 4% discount on the stock's price from the premium collected. And if AMAT is above $150 at expiration, my annualized gain on $565 per contract for the $14,435 of cash that is set aside for margin is over 46%.

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