Investors try to catch ‘falling knife’ with bets on risky funds during chip rout

The semiconductor sector experienced a significant downturn, largely attributed to a crisis in South Korea involving leveraged ETFs. Regulators in South Korea expressed regret over approving single-stock leveraged ETFs that tracked companies like Samsung Electronics and SK Hynix. These funds, initially launched in May with $3 billion in assets, swelled to approximately $9.1 billion, with retail investors holding about 92% of them. The substantial leverage in these products amplified losses, leading to a market-wide circuit-breaker trading halt in Korea and spreading to Hong Kong and pre-market trading in the US. For instance, Samsung Electronics fell 12.31% and SK Hynix dropped 12.47% in Seoul, while similar leveraged products in Hong Kong saw declines of over 23%.

Despite the broad selloff, some investors are attempting to "catch a falling knife" by betting on these highly volatile funds. This comes as implied volatility for the VanEck Semiconductor ETF (SMH) collapsed from 65% last month to 40% recently, reaching its lowest point since February. Conversely, a significant options trade demonstrated a bearish outlook. One trader made a $129 million bet by purchasing 20,100 630-strike SMH puts expiring November 20. This single trade accounted for over a third of the total premium in the SMH and is considered a synthetic short bet against the sector.

The market sentiment around semiconductors is mixed, with some retail investors being described as "leaning most heavily bullish since April" according to options flows. However, the open interest ratio of put to call contracts on SMH had reached a one-year bearish high in June, just before a 25% drawdown in the fund. Analysts noted that the volatility in memory chip stocks, like Micron Technology (MU), had already been elevated, with daily return volatility jumping to roughly 7% in May-June. The broader PHLX Semiconductor Index saw all 30 of its components close lower, with major players like Coherent (COHR) falling 11.4% and Intel (INTC) dropping 6.6%. This widespread decline was partly attributed to rising 30-year bond yields, which impact the valuation of long-duration growth stocks like chip companies.