Traders are getting worried the chip stock bull market is cracking. How to protect yourself
Options investors were buying too much protection iShares Semiconductor ETF (SOXX) on Tuesday. Puts traded at 1.5 times the 20-day average volume, 74,468 contracts. Options markets already reflect what you see on the charts. This rally is a roller-coaster.
South Korea KOSPI IndexThe best available example for the global hardware and memory supply chain that fuels this trade has experienced at least three separate declines of more than 10% this year, each compressed into three sessions or less. One of those declines was almost 20%. Semis yields are down more than 300% from 2025 lows to this month’s highs, but they are not without risk.
IShares Semiconductor ETF, YTD
What bothers me is that I’ve seen epic rallies before. Although this move wasn’t as sharp as the move to the top before the tech crash of 2000-2002 (the PHLX semiconductor index rose nearly twice as much as what we’re seeing today), I do remember volatility starting to rise with the price, something we’ve observed this year. I remember the S&P 500 peaked at the end of 1999, while tech continued to rise for a few more months before the bear market began. The S&P reached its highest level ever on June 2.
If the halvings are running on fumes like the Nasdaq did a generation ago, the next leg could be lower and steeper than anyone else is positioning for. For clues as to how sharp these declines might be, look at what happened earlier this month.
Trade
This is where put spreads make their living. A name with SOXX’s volatility is expensive to buy outright, especially since volatility in the sector has doubled since the beginning of the year. Selling a lower strike against harvests meaningfully reduces the cost while still providing meaningful insurance in the event of a severe decline.
The August 570/450 put spread yields roughly 3:1 and costs just over $31, or about 5% of the underlying asset. This is not cheap insurance. But considering the speed of movement we’re already seeing in this complex, it’s not expensive either.
This trade is not a bet on the semifinals collapsing. They bet that if they do, you won’t be the only one holding the bag.
