Caution Reigns in Chip Space: Options Recap

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Options traders are bracing against a drop in chip makers as earnings season marches on.

Here’s a breakdown a large bearish spread in the Market Vectors Semiconductor ETF (SMH) yesterday:

  • Roughly 22,000 September 100 puts were bought for $1.85.
  • Roughly 22,000 September 90 puts were sold for $0.49.
  • That translates into a net cost of $1.36.

Owning puts fixes the price where a security can be sold. Selling them generates income and creates an obligation to buy shares if the underlier falls to a certain level. Combining the two into a spread essentially uses money from contract one to cheapen the cost of the other, increasing the leverage from a drop to the lower strike.

In this case they will collect $10 if the ETF closes at $90 or lower on expiration — a potential profit of 635 percent based on their outlay. (See our Knowledge Center.)

SMH ended the session up 1.47 percent to $107.35. It may face downside pressure this morning because its biggest holding, Intel (INTC), fell after the closing bell. Weak sales at its up-and-coming data center division caused the drop.

Some other big names are set to report before the put spread expires. Nvidia (NVDA) is the biggest in mid-August. Broadcom (AVGO), Applied Materials (AMAT) and Broadcom (AVGO) are on the list as well.

The industry has also been hurt by trade worries as President Trump slaps tariffs on China, a major buyer of microchips. Maybe that’s why SMH hasn’t made a new 52-week high since March, while the Nasdaq-100 and SPDR Technology Fund (XLK) both set new records this month.

Overall option volume in SMH was twice the average in the last month on Thursday, with puts outnumbering calls by more than 3 to 1.

Market Vectors Semiconductor ETF (SMH) with profit level on put spread.
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.