Rally in chip stocks becomes the most hated in history. Here's the data

SMH put open interest has surged to just under 1.7 million contracts, the most ever, versus a little over 500,000 calls, while implied volatility is near 55%, its highest in more than a year. The article frames the activity as largely hedging rather than outright bearish speculation, with traders using the ETF as a lower-cost substitute for expensive single-stock options such as Micron at 105% implied volatility. Don Kaufman disclosed buying the SMH 535/525 put spread expiring in late August, reflecting expectations for a pullback after the semiconductor squeeze.

Analysis

The key signal here is not contrarian conviction but hedging demand leaking through the options complex. When call participation lags while put demand explodes and IV stays bid, the market is effectively paying up for insurance rather than expressing outright bearishness; that often extends trends because it removes the usual crowded-long fragility. In other words, the rally can persist longer when incremental buyers are worried enough to hedge every dip, which dampens the chance of a fast, one-way unwind.

Second-order, the sector ETF is becoming the cleaner volatility outlet because single-name risk is simply too expensive to express directly. That creates a mechanical flow advantage for the index basket: dealers are forced to warehouse sector-level downside instead of dispersing it across names, which can keep SMH supported relative to the highest-vol names even if the underlying tape gets choppy. The more expensive the single-name vol, the more the ETF becomes the default hedge instrument, which is mildly bullish for the index vs. the constituents.

The contrarian miss is that elevated put open interest is not automatically a bearish indicator here; it may be a symptom of under-hedged longs in a market where realized volatility can stay elevated without price damage. The real risk to the squeeze is not positioning alone but a catalyst that breaks the “buy-the-dip” reflex: margin pressure in crowded AI/semis, a guidance reset, or a macro shock that pushes vol higher faster than hedges can be monetized. Time horizon matters: this is a days-to-weeks flow story, but if vol mean-reverts while price remains firm, the put overhang can unwind into a further grind higher as hedges are closed.

Key Decisions for Investors

• Prefer selling downside in SMH rather than chasing single-name puts: consider a 30-45 DTE SMH put spread financed by a smaller call overwrite, targeting vol compression if the tape stays orderly; risk is a gap lower on a macro shock, so size for 1-1.5x premium at risk.
• Pair trade: long SMH / short a basket of the highest-IV single names in the group for 2-6 weeks. The thesis is relative-vol mean reversion, not outright bullish semis; this benefits if index baskets remain the preferred hedge vehicle.
• If initiating bearish exposure, use defined-risk structures only: short-dated put spreads in SMH rather than outright puts, because the current setup favors slow bleed rather than crash risk. Best entry is after a one- to two-day upside extension when IV is even richer.
• For longs already in semis, buy hedges on strength, not weakness: roll protection into rallies when IV is elevated but not spiking. That reduces the cost of insurance relative to waiting for a drawdown when skew becomes more expensive.
• Watch for a vol reversal signal: if SMH implied volatility starts falling while price holds highs, that is the cue to reduce hedge spend and add to longs. If IV keeps rising with flat-to-up price, the trend can persist longer than consensus expects.