U.S. Markets close in 1 hr 25 mins

Why large trade is cautious on chips

OptionMonster Staff (media-support-team@optionmonster.com)

Semiconductors have been a strong cyclical growth trade in the post-election rally, bucking the downtrend in the broader tech-heavy Nasdaq, but some leading chip makers have been pulling back this week.

The Market Vectors Semiconductor Fund is up 4 percent in the last month but today is down 3 percent to $68.93, and a large option trade is positioning for more downside potential.

OptionMonster's monitoring program shows that 15,000 February 64 puts were bought for $0.85 and $0.90 at the same second today. This is clearly a new position, as open interest in the strike was a mere 26 contracts before the trade appeared, and overall SMH puts outnumber calls by a bearish 15-to-1 ratio so far in the session.

In addition, more than 35,000 December 8.50 puts have been purchased in Advanced Micro Devices for $0.31 to $0.55 today in volume far above the strike's open interest of 2,519 contracts. AMD is down 5.39 percent to $8.43 today, though it is not one of SMH's holdings.

Long puts lock in the price where a stock can be sold, so they make money if shares decline. Investors use them to hedge long positions or to speculate on a drop. (See our Education section)

SMH's largest holdings are chip makers Taiwan Semiconductor (15.24%), Intel (14.52%), and Qualcomm (9.35%). All three are trading lower this morning.

More From optionMONSTER