July 6, 2015 / 6:16 PM / 2 years ago

Options traders exhibit caution ahead of chip earnings

NEW YORK (Reuters) - Hedging activity is rising for U.S. semiconductor stocks as investors fear that sector earnings may be weak, and share prices may fall after a recent flourish in mergers and acquisitions.

Options bets on an exchange-traded fund that tracks the sector have long been bearish, but there was a noticeable rise in hedging activity in June.

The Philadelphia SE Semiconductor Index lost 9 percent in June, more than twice the 4.4 percent fall for the broader S&P 500 Information Technology Index.

The Market Vectors Semiconductor ETF touched an all-time high of $60.13 in June but has lost 9 percent, and was down 48 cents at $54.64 on Monday.

“The price action in both the ETF and the semiconductor index are indicating that there is trouble ahead,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

Sentiment has been hurt after Micron Technology Inc gave a dismal earnings forecast in late June, citing a further drop in personal computer chip prices due to weak demand for PCs.

Since Micron’s forecast, puts activity has increased for Intel and Texas Instruments, two of the ETF’s top holdings.

With analysts expecting a choppy earnings season for chip companies, options traders have been lapping up the ETF’s put, usually used to place bearish bets.

Overall open interest, which had dropped to 70,000 contracts mid-May, has nearly trebled with puts outnumbering calls nearly 5-to-1. The ETF’s puts had attracted heavy hedging activity earlier this year as well, when puts outnumbered calls by about 10-to-1.

“The sheer volume in the puts leads me to believe that traders are hedging for earnings or general market volatility,” said Jim Smith, options strategist at OTR Global.

Big mergers in the sector, including Avago Technologies Ltd’s $37 billion deal for Broadcom and Intel Corp’s $16.7 billion purchase of Altera, have put the spotlight on the sector as the largest players look to beef up capabilities.

Most semi stocks currently include some M&A premium, and this could be problematic for companies that do not get acquired, analysts at Susquehanna Financial Group said in a recent note. Weak personal computer demand and slowing tablet growth could also be affecting sentiment.

Buyers of August puts at the $57 and $53 strike prices have pushed up open interest in the SMH ETF, with the two strikes now making up for about a fifth of the total open interest in the ETF’s options.

Reporting by Saqib Iqbal Ahmed; Editing by Richard Chang

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