Chip Stock Surge Sparks Heavy Options Trading

Semiconductor stocks are swinging higher on NVIDIA tailwinds

Sep 18, 2017 at 10:26 AM
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Along with the broader stock market, semiconductors had a record-setting week last week -- with the VanEck Vectors Semiconductor ETF (SMH) carving out new all-time peaks. An analyst-induced surge for NVIDIA Corporation (NASDAQ:NVDA) helped spark the bullish bias, while a nearly 7% surge for Micron Technology, Inc. (NASDAQ:MU) only created more tailwinds for chip stocks. Options traders were quick to react to the price action, with volume on both SMH and MU accelerated on Friday.

SMH Options Used to Guard Against Downside Risk

More than 18,600 call options changed hands on SMH on Friday -- two times what's typically seen, and volume settling in the 97th annual percentile. Most of the action was centered at the September 90 call, where it looks like the in-the-money strikes were closed out ahead of expiration.

And while 9,091 puts traded -- fewer than what was expected -- the October 91 put saw the biggest rise in open interest over the weekend, with 2,584 contracts added. Data from Trade-Alert points to buy-to-open activity here, but also suggests these puts may be tied to stock, suggesting a trader may be initiating a short-term options hedge.

Today, though, the exchange-traded fund (ETF) is showing little signs of slowing down, following its best week since mid-July. Out of the gate, SMH is up 1.1% at $92.11, fresh off a record high of $92.18. Longer term, SMH shares have surged 28.6% in 2017.

MU Call Options Hot Ahead of Earnings

Micron call volume was also running at a faster-than-usual clip on Friday, with 112,850 contracts traded -- 1.4 times what's typically seen. The bulk of the action came at the hands of one trader who bought to open 20,000 November 38 calls, while simultaneously selling to open the same amount of November 44 calls. Trade-Alert confirms a long call spread was initiated -- though it may be tied to stock -- for an initial cash outlay of $1.74 million (number of contracts * $0.87 net credit for the spread * 100 shares per contract), and likely replaces a now-expired September 33-36 call spread.

More broadly, the October 35 call is home to MU's top open interest position of 86,768 contracts. It seems safe to assume some of the activity here has been of the buy-to-open kind, as options traders bet on the stock being above $35 at back-month expiration on Friday, Oct. 20 -- a time frame that includes Micron earnings the evening of Tuesday, Sept. 26.

At last check, Micron stock was trading up 1.9% at $35.32 -- earlier hitting a two-year high of $35.49 -- on another strong session for NVDA shares. This is just more of the same for MU, though, with the equity boasting a 61.3% year-to-date return.

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