SMH shorts rebuild as the chip ETF gives back its October gains

SMH has reversed sharply after last week's bounce, dropping 7% over the past week to $518.52, and the positioning picture has shifted with it: short sellers have been adding exposure, options hedges have partially re-emerged, and the borrow market has tightened from the loose conditions that defined the October 28 note.

The short interest story is the clearest change since the last note. Short interest has climbed 7.3% over the past month to 13.2% of free float, with the bulk of that build arriving in the past two weeks. Week-on-week, shorts added roughly 1.4%. That is not a capitulation-level squeeze setup, but it is a steady rebuild. The ORTEX short score has held in a narrow range around 63 to 64 for the past fortnight, consistent with elevated but not extreme bearish conviction. For context, the lending pool has tightened from the very loose conditions of late October. Availability has pulled back to 168%, down nearly 31% on the week. That still means considerably more shares are available to borrow than are currently borrowed short, so there is no mechanical squeeze pressure, but the direction of travel is tighter than it was.

Options positioning has also shifted back toward caution, though far less dramatically than the swing seen between the previous two notes. The put/call ratio is 1.47, sitting roughly 1.1 standard deviations below its 20-day mean of 1.68. That looks unusual at first glance: a ratio of 1.47 implies more puts than calls, yet it is below its own recent average, because that average has been elevated. Traders have been running heavy put cover across the whole of October. The ratio has drifted down from the panic peaks of 1.97 to 1.99 seen in mid-to-late October, but it remains well above the 52-week low of 0.54. The acute fear from three weeks ago has moderated. What remains is a market that is structurally more defensive on semiconductors than it was through most of the year, without being at a fresh extreme. Cost to borrow edged up 15.5% on the week to 0.79%, still a low absolute level but a direction worth noting alongside the tightening availability.

The institutional picture adds texture. Morgan Stanley trimmed its SMH position by 1.4 million shares as of its last reported period, while Managed Account Advisors cut by roughly 791,000 shares. Both reductions were last reported as of June 30, so they predate the current selloff by several months. On the other side, Susquehanna International added more than 1.2 million shares over the same period, and Barclays added 870,000. Jasper Ridge Partners established an entirely new position of 1.1 million shares. The holdings picture is mixed rather than uniformly defensive, with market-maker activity from Susquehanna and Barclays likely reflecting hedging activity tied to their options books rather than directional conviction.

The stock is now down 17.8% over the past month. That is a significant drawdown for a large, liquid ETF with a $66 billion market cap, and it comes against a backdrop where the ORTEX short score has barely moved. Shorts added into the rally last week and are holding into this week's decline. The 52-week low in availability, 5.7%, was recorded earlier in the year when the lending pool was under far more strain than it is now. The current setup is notably different: availability is ample, borrow costs are subdued, and shorts are not being squeezed out. What to watch from here is whether the short interest build continues if the ETF stabilises at current levels, and whether the put/call ratio returns toward the 1.7 to 2.0 range that characterised the peak of October's defensive positioning.