SMH puts are pricing in lower volatility expectations than calls
Semiconductor stocks have been in a notable decline since Morgan Stanley last Monday said it was time to take profits on the red-hot sector, as evidenced by the VanEck Vectors Semiconductor ETF (SMH) 7.8% slide from its Nov. 24 record high of $105.83, last seen at $97.59. Underscoring these technical woes, just 56% of the 34 stocks we track under the "semiconductors" umbrella are currently trading north of its 80-day moving average, according to data from Schaeffer's Senior Quantitative Analyst Rocky White -- compared to a week-ago reading of 85%.
In the options pits, speculators appear to have been bracing for short-term struggles for the exchange-traded fund (ETF) that counts Taiwan Semiconductor (TSM) and Nvidia (NVDA) among its top holdings. SMH's Schaeffer's put/call open interest ratio (SOIR) of 5.40 ranks higher than 78% of comparable readings taken in the past year, meaning options traders are more put-heavy than usual.
Drilling down, the February 96 and 100 puts are home to peak open interest of 42,645 and 21,909 contracts, respectively. Data from the major options exchanges confirms significant buy-to-open activity at each strike, suggesting traders had been bracing for a pullback in SMH shares.
Today, the February 100 put is the fund's most active option, with 12,239 contracts on the tape. It looks like some of the activity here is of the sell-to-close kind, after SMH fell to an intraday low of $95.92 earlier. The bid price on these puts was last seen at $5.40, meaning the majority of options traders who bought these puts on Nov. 22 at a volume-weighted average price (VWAP) of $2.45 have more than doubled their money.
Looking elsewhere in today's accelerated options trading -- roughly 49,000 puts and 11,400 calls have traded, three times the expected rate -- one speculator may be initiating a bearish ratio spread or possibly a collar. Specifically, 11,000 May 93 puts were bought to open at the same time that 7,000 May 105 calls were sold to open.
Whatever the motive, now appears to be a more attractive time to buy premium on SMH puts, rather than calls. The fund's 30-day implied volatility (IV) skew of 21.1% ranks in the 7th annual percentile, meaning short-term puts have rarely been cheaper compared to their call counterparts. However, it should be noted that elevated volatility expectations are being priced in to all near-term options, per the semiconductor ETF's 30-day at-the-money IV of 22.6%, which ranks higher than 95% of all comparable readings taken in the past year.