Options Trader Gets Defensive During Chip Stock Surge

SMH options volume is running double the typical pace this afternoon

by Karee Venema

Published on Jul 26, 2018 at 1:42 PM
Updated on Jun 24, 2020 at 10:16 AM

Chip stocks are swinging higher today, thanks to a big earnings beat for Advanced Micro Devices (AMD). While AMD stock was last seen up 13% and fresh off an 11-year high of $18.45, the VanEck Vectors Semiconductor ETF (SMH) was last seen trading up 0.7% at $106.71. Nevertheless, one speculator appears to be betting on a quick retreat for semiconductors, initiating a bearish put spread using SMH options.

Taking a quick step back, around 97,000 calls and 26,000 puts have changed hands on SMH so far -- nearly three times what's typically seen, and volume pacing in the 98th annual percentile. The bulk of the activity has centered at the September 90 and 100 puts, where matching blocks of 19,100 contracts changed hands around the same time earlier.

According to Trade-Alert, this activity appears to be at the hands of one trader who opened a long put spread in the back-month series for an initial cash outlay of nearly $2.6 million (19,100 contracts * $1.36 net debit * 100 shares per contract). This is also the most the speculator stands to lose, should SMH remain at or above the century mark through September options expiration.

The trader will begin to profit on a move south of breakeven at $98.64 (bought 100 strike, less net debit). However, by also selling the lower-strike put versus playing a long put outright, they've also capped their potential profit at $8.64 per spread (difference between the two strikes, less the net debit), no matter how far the shares might fall.

This bearish positioning by options traders just echoes a growing trend. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the exchange-traded fund's (ETF) 10-day put/call volume ratio of 6.37 ranks in the 78th annual percentile, meaning puts have been bought to open over calls at a quicker-than-usual clip.

Considering SMH is boasting a 77% year-to-date advance, some of this put activity could be of the protective kind. Whatever the reason, short-term puts are currently more attractively priced compared to their call counterparts. The fund's 30-day implied volatility skew of 25.7% ranks in the 25th annual percentile.


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