SMH Put Options Pop as Chip Stocks Sell Off

Chip stocks have been selling off in recent sessions

by Karee Venema

Published on Dec 6, 2017 at 2:20 PM

Semiconductor stocks have been in a notable decline since Morgan Stanley last Monday said it was time to take profits on the red-hot sector, as evidenced by the VanEck Vectors Semiconductor ETF (SMH) 7.8% slide from its Nov. 24 record high of $105.83, last seen at $97.59. Underscoring these technical woes, just 56% of the 34 stocks we track under the "semiconductors" umbrella are currently trading north of its 80-day moving average, according to data from Schaeffer's Senior Quantitative Analyst Rocky White -- compared to a week-ago reading of 85%.

In the options pits, speculators appear to have been bracing for short-term struggles for the exchange-traded fund (ETF) that counts Taiwan Semiconductor (TSM) and Nvidia (NVDA) among its top holdings. SMH's Schaeffer's put/call open interest ratio (SOIR) of 5.40 ranks higher than 78% of comparable readings taken in the past year, meaning options traders are more put-heavy than usual.

Drilling down, the February 96 and 100 puts are home to peak open interest of 42,645 and 21,909 contracts, respectively. Data from the major options exchanges confirms significant buy-to-open activity at each strike, suggesting traders had been bracing for a pullback in SMH shares.

Today, the February 100 put is the fund's most active option, with 12,239 contracts on the tape. It looks like some of the activity here is of the sell-to-close kind, after SMH fell to an intraday low of $95.92 earlier. The bid price on these puts was last seen at $5.40, meaning the majority of options traders who bought these puts on Nov. 22 at a volume-weighted average price (VWAP) of $2.45 have more than doubled their money.

Looking elsewhere in today's accelerated options trading -- roughly 49,000 puts and 11,400 calls have traded, three times the expected rate -- one speculator may be initiating a bearish ratio spread or possibly a collar. Specifically, 11,000 May 93 puts were bought to open at the same time that 7,000 May 105 calls were sold to open.

Whatever the motive, now appears to be a more attractive time to buy premium on SMH puts, rather than calls. The fund's 30-day implied volatility (IV) skew of 21.1% ranks in the 7th annual percentile, meaning short-term puts have rarely been cheaper compared to their call counterparts. However, it should be noted that elevated volatility expectations are being priced in to all near-term options, per the semiconductor ETF's 30-day at-the-money IV of 22.6%, which ranks higher than 95% of all comparable readings taken in the past year.

VIX Options Signal Points to Possible Volatility Spike
VIX open interest is at an annual low
Altaba Stock May Be Sending Up a Buy Signal
AABA has seen some unusual options activity in the past couple of weeks
VFC Call Options Hot Ahead of Fiscal First-Quarter Earnings
VFC stock touched an all-time high earlier today
From Schaeffer's Pro Traders
Weekly Options Secrets Revealed

Direct from our Schaeffer's traders, your FREE guide to winning with weekly options!


Partnercenter


NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

MORE | MARKETstories


Trading Earnings Releases with Options
There are several “conventional” methods of trading earnings that most option traders are taught... Sponsored by TheoTrade
NHTC, AA, MRSN Stocks Suffer Nasty Pullbacks
A Chinese investigation is sinking NHTC
Alphabet Kicks Off Busy Week of Big-Cap Earnings
Dow components and FAANG stocks will be in focus next week
Trading Earnings Releases with Options
There are several “conventional” methods of trading earnings that most option traders are taught... Sponsored by TheoTrade