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.
PETQ Stock Rallies After ICR Conference
Jefferies reiterated its belief in PETQ stock after the presentation
Bank Earnings Season Sparks Heavy Options Trading
Goldman Sachs earnings are in focus today
Netflix Options Traders Bet On Outsized Earnings Move
NFLX will report earnings after tomorrow's close

a schaeffer's exclusive


Access your FREE insider report before it's too late!


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

IRA/401K Investment Guide: 2019 Stock Market Crash
Use gold to protect any IRA, 401(k), or retirement account from a looming financial crisis.
Star Wars Scare Sparks EA Options Activity; Earnings Beat Helps UAL Take Off
TBLT is the best stock on the Nasdaq today, tripling on a partnership
Morgan Stanley Backs Troubled Chinese E-Commerce Stock
Pinduoduo has had a drama-filled history on Wall Street
Research Exposes Shortcut to Stock Market Riches
A simple way to stop picking losers, and start cashing in like Wall Street's elite.