Chip Stocks Eye Volatile Expiration Week Trading Range

Options players have stacked their bets at two key January strike prices for the semiconductor ETF

by Bernie Schaeffer

Published on Jan 15, 2019 at 10:52 AM

The VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) enters standard January options expiration week with its trading range clearly cut out for it. Overhead, we have the round century level of $100, which is currently about 9.4% north of the exchange-traded fund's (ETF's) Friday close. And hovering directly near this psychologically crucial round-number price point is SMH's 80-week moving average, at $99.14. Following the fund's break below this trendline in mid-October, retests of the 80-week in November and December proved this moving average to be a stubborn layer of emerging resistance.

Options traders in the January series have piled on to underscore the significance of triple-digit territory for SMH, having accrued call open interest totaling 24,139 contracts at the 100 strike. This establishes the SMH January 100 call as not only the second-biggest front-month strike, but the ETF's second-biggest open interest strike overall.

Underfoot, meanwhile, we have the January 85 strike -- home to peak front-month (and overall) open interest of 32,747 puts in the monthly series expiring at the end of this week. This heavily populated put strike is just a few points north of the 160-week moving average, at $82.60, which chip stock bulls are hoping has once again marked a low for the shares, in what would represent a repeat of this trendline's role in August 2015 and the early months of 2016.

Around the two open interest-defined "brick walls" of $100 and $85 for SMH are a number of other levels of interest. On the upside, that includes $97.46 (a 50% retracement of its March 2018 closing high to its Christmas Eve closing low) and its year-over-year breakeven, right around $102. On the downside, the $87 area is home to a triple of SMH's all-time low ($87.63) and a double of its August 2015 low ($87.06).

Narrowing in on its current trading price, the ETF last Friday reclaimed a 9-handle for the first time on a weekly closing basis since Dec. 14, and finished -- at $91.57 -- comfortably above the levels marking a 10% bounce from that Dec. 24 low close ($89.06) and a 20% decline from the March 12 high close ($90.46), along with a double of the February 2016 low close ($91.26).

Against the backdrop of this sudden rebound in SMH, the fund garnered five consecutive days of inflows, according to etf.com, with year-to-date net inflows totaling $410.89 million -- already effectively replacing the bulk of the net $446.57 million in value that flowed out from the time of the March peak through year-end 2018.

Data from the major options exchanges suggests a skew toward buy-to-open activity at SMH's peak January open interest strikes, which means there could be some heightened volatility in the shares as these "high interest" price points are approached. Investors should be on the lookout for these focus strikes to potentially amplify any moves in SMH by exerting a "magnetic pull" during the days leading up to expiration, particularly given the chip sector's sensitivity to trade-related headlines.

smh weekly chart

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 13.

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