Back Derivatives Strategy

Why Now Could Be a Good Time to Take Some Chips Off the Table For the Semiconductors

Published on July 27, 2025

Jeff Jacobson

With the main semiconductor etf (SMH) up nearly 70% from the April lows, I believe now is a good time to consider establishing “cheap” sector hedges. Besides the sharp rally to new all-time highs, there are several other reasons why I think protective put spreads make a lot of sense:

1) SMH peaked on a relative basis to both SPY and QQQ back on July 15^th, and has since been lagging

After underperforming and leading the market lower on the tariff concerns in March/April, the SMH has outperformed the market (SPY) by ~ 30% from the April lows to the recent highs. The semis also led the overall tech trade higher by outperforming the Nasdaq (QQQ) by over 22% during that same April to July period. Over the past 10 days, however, SMH has trailed both indexes by ~ 3%. While that doesn’t seem like a lot given the huge rally and outperformance since April, the fact that the semis have started to lag even as the market has continued to move higher could be a potential warning sign for the group.

The SMH/SPY relative spread climbed more than 30% from the April lows to the recent highs, and is now starting to move lower

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AI-generated content may be incorrect.

2) We are already starting to see a few cracks in some of the names as they report

With only a few of the top-weighted names having reported earnings thus far, we have already had our share of disappointments. Chip equipment giant (ASML) declined by 8.7% when they reported on 7/16. Then there were the disappointments this past week with Texas Instruments (TXN) suffering its worst earnings decline in the last 10-years when it dropped over 13% after reporting earnings late Tuesday, followed by the 8.5% decline Intel (INTC) had on Friday after reporting their earnings on Thursday after the close. While the AI chip trade has been leading the group higher for some time now, the cracks we are starting to see in some of the sub-sectors (chip equipment, industrial and PC related) means that should the AI chip trade pause, or start to decline, it seems unlikely the other parts of the semi trade will help stem that decline.

3) SMH 2-month put volatility is at a fresh 1-year low

Against this backdrop, and thanks to VIX hitting new relative lows, SMH put vol now trades at 1-year lows. This is with several of the largest names still due to report over the next month or so (NVDA, AVGO, and AMD to name a few). Looking at SMH Sept 40-delta put vol, which trades ~ 28, it is well below where the implied vols trade for those other names (all trade ~ 38 or higher). In fact, we have started to see implied vol move up for both NVDA and AVGO, even as SMH implied vol continues to make new lows.

SMH 2-month 40-delta put implied volatility at a new 1-year low

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AI-generated content may be incorrect.

SMH vol continues to move lower, while vol for names like NVDA and AVGO has been climbing the last week as earnings start to get priced in

These are just some of the reasons why I believe investors who are long this sector should start to consider these low-cost hedges now. Here is a hedge trade I want to highlight:

Buy SMH Sept 280 puts (37d, 28 vol)
Sell SMH Sept 240 puts (8d, 36 vol)
Costs ~ $6.85 (SMH 287.49 Fri close ref)

Trade Details:

Buying the Sept 40-point wide protective put spread in SMH after a 70%+ rally off the lows and large outperformance to both tech and the overall market
Have started to see a few cracks in the semi trade already, and should we see the AI chip names pullback the entire sector could see a decent decline
Put spread 2.6% below spot, and is capped to the downside 16.5% lower (at the May support and 200-day moving average)
Structure offers a nearly 5x to 1 max payoff, and captures 8 points of put vol skew (why I favor the put spread over outright puts)
Not only is SMH 2-month put vol at the 1-year lows, but it has continued to move lower even as some of the larger names have started to see a bid to Sept vol (to reflect earnings)
Sept expiration will capture several of the largest weighted earnings (NVDA, AVGO, AMD and AMAT to name a few)
Trade can be initiated as a sector (tech) hedge after a massive move higher, or as a limited-risk bearish bet
Please contact me or the 22V sales team for updated pricing and execution capabilities

SMH rallied 72.5% from the April lows to the recent highs. Sept put spread hedge is targeting a possible pullback to the 240 support area

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