Options traders were buying a lot of protection on the iShares Semiconductor ETF (SOXX) on Tuesday. Puts traded 1.5x the 20-day average volume, 74,468 contracts. Options markets are echoing what you are already seeing in the charts. This rally is a roller-coaster.
The South Korean KOSPI Index, as good a proxy as exists for the global hardware and memory supply chain feeding this trade, has suffered at least three separate drawdowns exceeding 10% this year, each compressed into three sessions or fewer. One of those drops was nearly 20%. The returns the semis have seen, more than 300% off the 2025 lows to this month’s highs have been extraordinary, but they’re not risk-free.
IShares Semiconductor ETF, YTD
What troubles me is that I’ve seen epic rallies before. Although this move isn’t quite as sharp as the one leading into the top before the 2000-2002 tech wreck (the PHLX semiconductor index rallied almost twice as much as the one we’ve seen today), I remember that volatility started to rise with price, something we’re observing this year. I remember that the S&P 500 actually topped first, at the end of 1999, while tech kept rising for a couple more months before that bear market commenced. The S&P hit its high so far on June 2nd.
If semis are running on fumes the way Nasdaq did a generation ago, the next leg lower could be faster and steeper than anyone’s positioned for. Look at what happened earlier this month for clues to how sharp those drawdowns can be.
The trade
This is where put spreads earn their keep. Buying a put outright on a name with SOXX’s vol is expensive, particularly as volatility has doubled in the sector since the beginning of the year. Selling a lower-strike put against it harvests cuts the cost meaningfully while still providing meaningful insurance in a severe downdraft.
The August 570/450 put spread pays roughly 3:1 and costs just over $31, about 5% of the underlying. That’s not cheap insurance. But given the speed of the moves we’re already seeing in this complex, it isn’t expensive either.
This trade isn’t a bet that semis crash. It’s a bet that if they do, you’re not the one left holding the bag.
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