Chip stocks bounced 10% on Monday. The smart money is buying insurance against the next drop.

Micron surged 10% on Monday after losing 13% on Friday. Marvell jumped 9% on news of its addition to the S&P 500.

The semiconductor sector bounced back from its worst single-day rout since 2020, when the Philadelphia Semiconductor Index fell roughly 10.3% and erased over $1.3 trillion in market value. But one corner of the options market suggests the rebound is being treated less as a recovery and more as a chance to buy protection before the next leg down.

Record put buying

Open interest in put contracts on the VanEck Semiconductor ETF (SMH) has surged over the past two months to just under 1.7 million, the most ever recorded, according to Bloomberg data going back to the fund’s 2011 launch. The volume indicates the puts are mostly being bought, not sold, meaning traders are paying for downside protection rather than betting on a collapse.

Implied volatility on SMH sits at 46, more than 2.5 times the S&P 500’s VIX at roughly 17. That gap has created a hedging trade that CNBC described as popular among institutional investors: sell expensive semiconductor volatility, buy cheap broad-market protection.

What triggered the rout

Friday’s selloff was sparked by Broadcom’s AI revenue miss, a 14% shortfall against elevated expectations that cascaded across the sector. Nvidia fell about 6%, shedding roughly $740 billion in market value, while AMD dropped 10.9% and Intel fell 11.3%.

The damage was concentrated in names that had rallied the hardest. Intel was up 169% year-to-date before the drop. AMD was up 118%.

Jensen Huang told investors not to panic, saying the selloff gave them “a chance to buy at a discount” and arguing that the AI buildout remains in its early innings. Samsung and SK Hynix, which supply the HBM4 memory Nvidia’s next-generation systems require, also sold off heavily in Asian trading before stabilising.

The bull case and the hedge

The fundamental demand story has not changed. Hyperscalers are spending more than $600 billion on AI infrastructure this year, and Nvidia’s data centre revenue grew 93% year-on-year in its most recent quarter.

But valuations have stretched to levels that leave no room for misses. A 14% revenue shortfall at Broadcom, in an AI segment that still grew substantially, was enough to erase $1.3 trillion in a day.

The record put buying reflects this tension. Traders are not abandoning chip stocks. They are staying long and paying for insurance, which is the posture of a market that believes in the destination but does not trust the road.

What to watch

Nvidia’s Vera Rubin platform enters production this quarter, with deliveries expected in Q3. Any supply-side hiccup in HBM4 memory or advanced packaging could trigger another sharp move in either direction.

The options market is priced for continued volatility. Whether that volatility resolves upward or downward will depend on whether the next round of earnings can meet expectations that, after an 80% run in Korea’s Kospi and a 169% surge in Intel, are priced for perfection.