Volatility signals in the chip space

While the pullback in semiconductor-related stocks has had a relatively broad ripple effect, it hasn’t been monolithic. Core “memory” stocks like Micron (MU), Sandisk (SNDK), Western Digital (WDC), and Seagate (STX) recently experienced sharp setbacks, but the moves in semiconductor equipment and materials stocks like Applied Materials (AMAT), ASML (ASML), KLA (KLAC), and Lam Research (LCRX) have been more modest.

For example, at noon ET on Wednesday, the PHLX Semiconductor Index (SOX) was down approximately 11% from its June 3 record close. By contrast, shares of Applied Materials (AMAT), a company that provides various support services to chip producers, were roughly 1% above their June 3 close, and had hit an all-time intraday high for the second day in a row:

However, the bottom half of the chart shows AMAT had something in common with many of the harder-hit chip-related stocks—high volatility. Both the 30-day implied volatility (IV) and historical volatility (HV) readings were at or near their highest levels in months on Wednesday, with AMAT’s IV actually hitting a new 52-week high.

Unlike HV, which simply measures a stock’s past price movement, IV represents how much options traders expect it to move in the future. That has important implications for both stock and options traders. In this case, options traders are expecting more volatility from the AMAT over the next 30 days than they have at any time in the past year (something that may strike some traders as unusual given IV tends to jump when a stock sells off sharply, rather than when it’s hitting new highs).

Importantly, though, expectations of increased volatility have nothing to do with a stock’s direction—high IV simply “forecasts”  more price movement over a certain period, not whether that movement will be up or down.

But as longtime options traders know, high IV can inflate options prices. That means, regardless of whether they think a stock will rally, fall, or move sideways, these traders often look to sell potentially overpriced high-IV options rather than buy them (or, alternately, use multi-legged strategies like vertical spreads that combine short and long options). For example, a trader with a bullish outlook on a stock may prefer to sell high-IV puts rather than buy high calls.

Note: Morgan Stanley & Co. strategists currently maintain an Equal-weight rating on AMAT.

Market Mover Update: Oil volatility and geopolitical surprises may not have quite the same psychological impact they did three months ago, but Wednesday showed they still have some power to move the market. As the White House pledged new military action against Iran, oil prices rallied more than 4% intraday, while the S&P 500 (SPX) fell 1.6%:

Yesterday marked the second time in the past two weeks that oil bounced after pulling back to the approximate level of its early-May lows, forming well-defined “support zone” roughly between $82.20 and $84.60 in this contract.

Meanwhile, August gold futures (GCQ6) tumbled more than 4% on Wednesday, hitting their lowest level ($4,092.30) since November as elevated inflation and a strong labor market continue to push back expectations for Fed rate cuts. The Fed is expected to leave rates unchanged at its meeting next week, but the CME FedWatch tool currently shows higher odds for a Fed rate hike (43%) than a cut (32%) in December. Wednesday's headline year-over-year Consumer Price Index (CPI) increase was in line with expectations, but still hit a three-year high of 4.2%.

Today’s numbers include (all times ET): Producer Price Index (8:30 a.m.), weekly jobless claims (8:30 a.m.).

Today’s earnings include: Adobe (ADBE).

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