Aggressive options trading in semiconductor stocks is creating a notable volatility spread, allowing traders to maintain a bullish stance on this rallying sector while hedging broader market risks. The strategy involves selling expensive downside protection in semiconductor names, like the VanEck Semiconductor ETF (SMH), where implied volatility is 46—over 2.5 times that of the S&P 500, which trades at a VIX of around 17. This week, traders have shifted their focus from call buying to put selling, with over five times more puts sold than calls.
This approach is particularly compelling as it capitalizes on the rich premiums in semiconductor options while simultaneously allowing traders to go long on S&P 500 volatility through index puts or VIX calls. The potential for profit exists whether semiconductors rise or fall, as the income from sold puts can offset any losses in the index. As Scott Bauer of Prosper Trading Academy notes, this strategy offers a favorable risk-reward dynamic, especially in a market where volatility could decrease even if semiconductor prices decline.
Market professionals should consider this strategy as a way to exploit volatility discrepancies while maintaining exposure to a bullish semiconductor outlook.
Source: cnbc.com