Semiconductor ETFs brace themselves for market volatility ahead of Nvidia’s critical earnings announcement.
Put-option trading on VanEck Semiconductor ETF (SMH) has spiked to its most cautious level in ten months amid fears that Nvidia’s results could ripple through the broader semiconductor sector.
Currently, Nvidia accounts for about a fifth of SMH’s assets, meaning a drop in earnings or negative guidance could greatly affect the ETF and the larger semiconductor industry.
According to Trade Alert, roughly 2.4 put options have been traded daily for every call on the VanEck Semiconductor ETF over the last 10 days.
By 3 p.m. ET (1900 GMT) Tuesday, about 105,000 put options had changed hands on the VanEck Semiconductor ETF, far outpacing 16,000 calls. Last week, one trader bought 50,000 put options to guard against SMH’s shares falling by 10%—below $220—before the month’s end.
Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group, commented on the ETF’s put buying, “The put buying in SMH ahead of Nvidia’s earnings reflects growing concern about potential volatility for the entire sector following the report.”
He added that investors were selling options to profit from the surge in volatility expectations ahead of the chipmaker’s earning announcement. While there’s been a lot of defensive positioning in SMH, in Nvidia, traders are taking advantage of elevated implied volatility by monetizing rich premiums before earnings reveal. However, that means most of these investors don’t anticipate a major market swing after the chipmaker’s results.
Analysts expect lower earnings for Nvidia, especially since its Chinese market was cut off
Nvidia ranked second on Interactive Brokers’ list of the 25 most actively traded securities by client orders. However, it was one of just two stocks with net selling—a sign of investor caution despite great stock performance, according to Steve Sosnick, chief strategist at Interactive Brokers.
So far, Nvidia shares are up about 0.7%, while SMH shares are up about 1.2%. However, investors believe Nvidia could see a slower growth rate than last year. Some even expect an EPS miss.
In April, the US government imposed restrictions on the company’s chip exports to China. It stated that Nvidia will require export licenses for its H20 chips, targeting the Chinese market.
Ideally, the export controls have interfered with Nvidia’s sale of H20 chips to China, leading to a $5.5 billion inventory write-down for the company so far, which could result in lower earnings.
The Trump administration has only cited concerns that the firm’s technology may be utilized in, or diverted to, a supercomputer in China or aid military operations.
Nvidia’s CEO, Jensen Huang, criticized the new policies, claiming they only sabotaged American companies.
Nevertheless, the chip manufacturer is working on a new product line for the Chinese market. According to sources familiar with the matter, the company will start producing its new chips in June. The firm will sell the new chips for cheaper prices, roughly between $6,500 and $8,000, especially since they’ll have simpler manufacturing requirements.
However, till the chips hit the market, Nvidia was effectively foreclosed from the Chinese market.
