Introduction
Traders in the options markets are preparing for significant volatility ahead of Nvidia's earnings report, with increased trading activity noted in the VanEck Semiconductor ETF.Context
The VanEck Semiconductor ETF, the largest in its category with approximately $22 billion in assets, has seen a staggering average of 2.4 put options traded daily for every call option over the past 10 days. This level of defensive trading is the highest observed in nearly 10 months, according to data from Trade Alert. Call options provide the right to purchase shares at a predetermined price, while put options allow investors to sell shares at a specified price.Developments
The heightened activity in put options, specifically for the SMH ETF, indicates growing concern about potential volatility for the semiconductor sector following Nvidia's earnings report. On Tuesday alone, around 105,000 put options were traded in contrast to approximately 16,000 call options by 3 p.m. ET (1900 GMT).In a significant move, one investor purchased 50,000 put options for the SMH ETF, which would protect against a decline of about 10%, bringing the share price below $220 by the end of May. Nvidia, which represents about 20% of the ETF's assets, has a substantial influence in the AI market, extending its impact beyond its proportional weight within the fund.
While investors focus on defensive strategies supporting the SMH ETF, trading activity related to Nvidia itself has been more varied. Investors have been selling options in anticipation of increased volatility surrounding Nvidia's earnings announcement, suggesting a belief that the market reaction to the results may not be excessively negative.
Despite this strategic hedging in the SMH ETF, Nvidia ranks second on Interactive Brokers' list of the 25 most active securities by client orders, indicating strong investor interest in the upcoming report. However, it remains one of only two stocks where investors are net sellers, suggesting caution following a solid run.