Following the huge run-up in equity markets, I want to prepare for more volatility, particularly in chips. This volatility forces me to be cautious after outsized moves, yet I welcome opportunities for more than likely further strong moves this month. I’m expressing a bearish view on chip stocks as I expect significant negative price action to continue in the VanEck Semiconductor ETF (SMH). SMH has staged a historic rally over the past two weeks of trading. SMH hit an intraday low of around $200 on last Monday’s massive volatility injection. Just 10 days later, SMH hit an intraday high of $247.34 and closed near that high on Thursday. SMH YTD-Mount VanEck Semiconductor ETF (SMH), YTD That’s a remarkable jump for this market-leading high-beta ETF. However, I believe now is the time to take SMH profits if you are long or hedge for a slight dip. After the Cboe Volatility Index hit its intraday high above 65 last Monday, investors witnessed a historic volatility collapse as the VIX fell around 75% to a current level of 15. During this massive volatility drop, investors saw Nvidia (NVDA) (a 21% stake in SMH) bounce off $90 and climb back up to nearly $125. NVDA will need to continue to go lower for my bearish view to come true in the next few weeks. This comes with risk as Nvidia’s second quarter earnings report is due out on August 28. This uncertainty reinforces the fact that I need to define the risk in my view and that is why I want to buy a put spread in SMH. The Trade: Buy the $242.50 SMH put (expiration 8/30/24) for $6.25, sell the $232.50 SMH put (expiration 8/30/24) for $3.00. This put spread costs $3.25 of a $325 per lot spread. SMH was trading at around $245.50 at the time of this trade. If the markets rise and NVDA delivers another underwhelming earnings report, this trade will expire worthless. However, if SMH goes down, that $10 spread will fill and an investor will make $675 per lot spread ($10 minus the cost of the spread, $3.25). DISCLOSURES: (Long side) All opinions expressed by CNBC Pro staff are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent or affiliates and may have been previously disseminated by them on television, radio, the Internet or any other medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS OF SERVICE AND PRIVACY POLICY. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO PURCHASE SECURITIES OR OTHER FINANCIAL ASSETS. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT THE UNIQUE PERSONAL CIRCUMSTANCES OF ANY INDIVIDUAL. THE ABOVE CONTENT MAY NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. YOU SHOULD ALWAYS CONSULT WITH YOUR OWN FINANCIAL OR INVESTMENT ADVISOR BEFORE MAKING ANY FINANCIAL DECISIONS. Click here to view full disclaimer.
