Bears cash in chips on $SMH puts

Chip makers have retraced some of their year-to-date gains over the past two weeks, and option traders have racked up large profits in downside positions in the VanEck Vectors Semiconductor Fund.

On Apr. 25, Investitute’s proprietary programs flagged the purchase of 8,500 May $114 puts for $1.38 as part of a complex bearish spread with shares at $118.36. This was clearly a new position, as open interest in the strike was only 2,606 contracts before the activity appeared.

Those puts traded up to $6.16 today, almost 4.5 times their purchase price. The stock fell 8.5% in the same time period, underscoring how options can far outperform their underlying shares.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

SMH traded as low as $108.15 early in the session but crawled back higher to close at $110.58 today, still down 1.41% for the day. The exchange-traded fund has dropped 7.54% since making a new all-time-closing-high on April 24.