Chip Stock Sell-Off Results In Rapid Options Trading on Sector ETF SMH – Schaeffers Research (blog)

A broad pullback in semiconductor stocks is plaguing the U.S. equity market today, all because of Taiwan Semiconductor’s (TSM) smartphone warning. The VanEck Vectors Semiconductor ETF (SMH) has dropped 4.2% as a result — the biggest single-day drop since November — and was last seen trading at $100.40. That perch above the $100 level is notable in its own right, but this region, home to the 160-day moving average, has been especially supportive in recent weeks. It also sits right above SMH’s year-to-date breakeven point. And with the exchange-traded fund (ETF) again testing these critical technical levels, options are trading at a rapid pace.

In fact, intraday volume on the chip ETF was last seen at a fresh 52-week high of 169,337 contracts. The majority of these have been puts, which have already tripled their average daily volume. New positions are being opened at the August 95 put, the most popular option today, but it’s not clear whether the puts were bought or sold.

But there was also a substantial trade on the call side, too, with someone buying to open 4,000 May 106 calls for $1.36 each. This would put the speculator’s cash outlay at $544,000 (contracts purchased * 100 shares per contract * price paid for each), and the trade would become profitable should SMH rise to $107.36 (strike plus premium paid) by the close on Friday, May 18, when the options expire.

One options trader is already sitting on solid paper profits. Specifically, yesterday’s two largest options trades on the ETF both involved buy-to-open activity at the weekly 4/27 102.50-strike put. The puts were bought for around $1 in each trade, meaning breakeven was roughly $101.50.

Finally, it’s worth noting that the VanEck Vectors Semiconductor ETF currently has a 30-day implied volatility skew of 24.1%, which ranks in the low 9th percentile of its annual range. This means that calls are actually attracting higher-than-normal volatility premiums when compared to puts.

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