SMH Shorts Pull Back, but Options Traders Stay Defensive

SMH has dropped 17.6% over the past month to $540.53, yet the short-selling community spent this week actively unwinding positions — creating an unusual split between price weakness and short-side retreat.

The positioning story is genuinely mixed. Short interest fell hard this week, down 12.6% to 14.0% of free float, after running as high as 17.7 million shares on July 27. That's a meaningful reversal from a period of elevated conviction on the short side. The borrow market has loosened considerably in tandem: availability has jumped to 245.8% — nearly triple where it was last week, when it was below 50% and lending supply was genuinely constrained. Cost to borrow has also eased, falling 13.5% on the week to 0.86%. Just two weeks ago, the borrow market was as tight as it has been all year, with availability hitting a 52-week low of 5.7% on July 14. The rapid loosening suggests short sellers who pressed the trade when borrowing was hardest are now returning shares and stepping away.

Options positioning tells a different story, and it's worth sitting with the contrast. Puts still dominate the options market heavily — the put/call ratio is 2.26, nearly four times the kind of balanced reading you'd see in a neutral market. The ratio has actually eased from its recent extreme of 3.34 on July 27, which itself was near the 52-week peak of 3.61. The z-score of -1.88 shows the PCR is running almost two standard deviations below its 20-day mean of 2.85 — meaning that by recent standards, even a PCR above 2.0 now reads as relatively less defensive than the prevailing tone. That 20-day mean is structurally elevated compared to most market periods, reflecting weeks of persistent hedging demand on the semiconductor sector.

The ORTEX short score has also softened. It came in at 62.7 on July 30, down from a recent peak of 67.0 on July 20. That still places the fund in territory that ORTEX considers meaningfully elevated — but the directional shift over the past ten days is consistent with the short-interest unwind: a positioning reset rather than a new wave of conviction. Institutional data (last reported March 31) shows Morgan Stanley added over 2.8 million shares that quarter, while JPMorgan and Bank of America also built positions. The largest single holder, Managed Account Advisors, trimmed by 2.25 million shares. The picture there is mixed, but the scale of the Morgan Stanley accumulation was notable.

The week's tension, then, is this: short sellers are retreating at speed from what was a very crowded trade, lending conditions have loosened sharply, and the short score is fading — yet options traders remain structurally hedged at levels that rank among the most defensive of the past year. The borrow market suggests the tactical short case has run its course for now. The options market suggests investors aren't convinced the worst is behind the sector.

What to watch next is whether the put/call ratio continues its drift back toward the 20-day mean, and whether the short-interest unwind holds — or whether fresh sellers return to test the lows as the month-long decline of 17.6% puts the ETF's technical footing under scrutiny.