Skepticism Ramps Up On This Red-Hot ETF

Options traders have been bearish on SMH despite its record highs

by Patrick Martin

Published on Nov 6, 2017 at 3:55 PM

Semiconductor stocks have been red-hot lately, between an AMD-Intel partnership and Broadcom's unsolicited buyout bid for Qualcomm. Amid all of the action, the VanEck Vectors Semiconductor ETF (SMH) hit a record high of $104.20 today, last seen up 1% at $104.04. Below, we will examine SMH's record run and see how options traders have been positioning themselves.

Today's milestone is the cherry on top of what's been an excellent year for the exchange-traded fund (ETF) -- up roughly 45% year-to-date. The shares' rising 10- and 20-day moving averages have guided SMH higher since late August, containing pullbacks in late September and October.

Nevertheless, short sellers are still flocking to the chip ETF. Short interest increased by 3.7% during the last reporting period to 19.77 million shares. It would take more than 11 days for these bearish bettors to fully cover their positions, at SMH's average daily trading volume. This is a major source of potential buying power that could enter the market. 

This skepticism is seen elsewhere, too, with options traders favoring puts over calls in the past two weeks. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows SMH with a top-heavy 20-day put/call volume ratio of 7.30.

Put volume has picked back up today, too. At last check, put volume was running at double the expected pace, with 30,839 contracts exchanged -- on track for the 94th percentile of its annual range. The bulk of the action is centered at the November 105 put and weekly 12/1 108-strike put. While it's not entirely clear how this activity is lining up, it could be a result of one trader rolling their front-month bets up and out to the weekly series or a initiating a short-term calendar spread.

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