Options Traders Turn Defensive on This Surging Semiconductor ETF

Chip stocks have put in a strong technical performance over the past 12 months

Oct 10, 2017 at 11:46 AM
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Semiconductor stocks have been ripping higher over the past 12 months, as evidenced by the price action in the VanEck Vectors Semiconductor ETF (SMH). The exchange-traded fund (ETF) is up 37.8% year-over-year, with its trusty 80-day moving average serving as a reliable foothold during rare pullbacks. What's more, the shares hit a record high of $96.47 earlier on NVIDIA stock tailwinds, and were last seen up fractionally at $95.62. Options traders have been growing skeptical, though, and have increased their bearish exposure to SMH in recent weeks.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 9,351 puts on SMH in the past 10 sessions compared to 1,709 calls. The resultant put/call volume ratio arrives at 5.47 -- versus a reading of 3.00 from two weeks back.

Echoing this heavy put-skew is SMH's Schaeffer's put/call open interest ratio (SOIR) of 4.27. Not only does this show that puts more than quadruple calls among options set to expire in three months or less, but it ranks higher than 70% of all comparable readings taken in the past year. In other words, short-term speculators are more put-heavy than usual toward the fund.

Drilling down, peak SMH open interest of 47,144 contracts is located at the October 88 put, followed by the November 69, 76, and 82 puts -- where a collective 101,051 contracts reside. Data from Trade-Alert points to significant buy-to-open activity at each of these strikes, suggesting options traders are bracing for a steep retreat in chip stocks over the next several weeks.

However, given the how deep out of the money these strikes are, it's likely some of the put buying is a result of semiconductor bulls protecting paper profits with an options hedge. Whatever the reason, now is an attractive time to buy premium on short-term SMH options, per its Schaeffer's Volatility Index (SVI) of 17% -- in the 25th annual percentile, hinting at lower-than-usual volatility expectations.

Meanwhile, should SMH continue this upside into the close, it would mark its 11th straight daily gain -- its second-longest win streak on record. According to Schaeffer's Senior Quantitative Analyst Rocky White, the fund's lengthiest stretch of gains began on May 21, 2014, and ended 15 days later on June 11, with the shares up 8% after all was said and done. This time around, SMH is up 6.8% from its Sept. 25 close at $89.49.

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