SMH Options Trader Targets Familiar Support

Chip stocks have collectively outperformed the broader Nasdaq Composite over the past year

by Karee Venema

Published on Aug 23, 2017 at 2:43 PM

Chip stocks have put in a strong technical performance in 2017. According to Schaeffer's Senior Quantitative Analyst Rocky White, the 38 names we track under the "semiconductors" umbrella have averaged a 30% year-over-year gain, besting the Nasdaq Composite's (COMP) 20.2% return. Likewise, the VanEck Vectors Semiconductor ETF (SMH) has added 30.6% in the past 12 months. Here's a closer look at the technical support lifting SMH, and how options traders have reacted to the impressive price action.

SMH Options Near Peak Levels

SMH's long-term uptrend has been underlined by its 80-day moving average -- currently located at $85 -- which has served as a springboard for the shares since March 2016. More recently, the exchange-traded fund (ETF) has staged several successful tests of this rising trendline since hitting a record high of $89.72 on June 9, last seen trading at $86.36.

smh daily chart august 23

The fund has been hot with options traders, too, with 543,198 contracts currently open -- in the 87th annual percentile. Breaking it down even further, 382,455 puts and 160,743 calls are currently outstanding. Despite this put-bias, peak open interest of 51,911 contracts is found at the September 90 call. It's not entirely clear how options traders have used these front-month calls, but data from Trade-Alert points to a possible collar with the September 90 puts.

Regardless, SMH call volume was accelerated on Tuesday, with roughly 43,000 contracts changing hands -- eight times what's typically seen, and just shy of the 12-month high of 43,606 contracts traded in a single session on July 19. The activity was mostly centered on the front-month series, where it looks like one trader may have initiated a long call spread with the September 85 and 86 calls, and possibly closed a four-way spread at the September 90 and 95 calls and puts in the process.

If a long call spread was initiated, the options trader paid an initial cash outlay of $490,000 (7,000 contracts per spread * $0.70 net debit paid * 100 shares per contract). This is the most the spread strategist stands to lose, should SMH settle at or below the bought 85 strike at the close on Friday, Sept. 15 -- when the series expires. Profit, meanwhile, will accumulate on a move north of breakeven at $85.70 (bought strike plus net debit), but is capped at $0.30 per spread (difference between the two strikes, less net debit) due to the sold 86 strike.
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