SMH is delivering a painful week for the bears who were piling in just days ago — a sharp 11% rally has collided directly with the most defensively positioned options market of the past year.
The price action has been stark. SMH closed at $602.14 on Tuesday, up 4.5% on the day and 10.7% on the week, recovering all of last week's losses and then some. A month ago the fund traded around $506. The near-19% monthly gain puts it back above the $600 level and squarely back in the territory where the last wave of short-building began. The previous note flagged shorts and options traders moving in lockstep to the downside — that thesis has been tested hard this week.
Options positioning remains historically extreme, but the framing has changed. Put/call ratio has climbed further to 2.98, now sitting at its highest reading of the past 52 weeks — surpassing even the 2.90 level flagged last week. At 1.67 standard deviations above its 20-day average of 2.48, the hedging demand is persistent rather than panicked. The paradox is notable: the PCR keeps rising even as the price rips higher. That combination typically reflects either dealers rolling protective structures forward, or investors with long positions who are not yet willing to abandon downside cover despite the rally. Either way, the options market is not capitulating to the bullish price action.
Short interest tells a more complex story — and it has shifted since last week's note. Shorts are now running at 11.0% of free float, down roughly 4% on the week from a recent peak near 11.8% in mid-May. The directional drift is a modest cover: shorts who built positions through late April and early May near lower prices are trimming into strength. The month-long figure is still slightly up (+2.9%), so the broader positioning hasn't unwound — it has merely eased at the margin. Borrow availability has loosened meaningfully, moving from very tight levels (below 6% on May 11, when borrow was essentially fully consumed) back to 81.9% today. That swing in the lending market reflects the covering dynamic: as shorts bought back stock, availability reopened. Cost to borrow remains low at 1.12% annualised — there is no squeeze pressure in the borrow market now, in contrast to the conditions seen three weeks ago.
The ORTEX short score of 62.3 has drifted lower over the past two weeks, from a recent high of 64.5 on May 14. That gradual decline is consistent with conditions becoming less charged on the short side — a score still comfortably above 60 means positioning remains elevated by historical standards, but the peak intensity appears to have passed. Institutional flow data (as of March 31) showed Morgan Stanley adding more than 2.8 million shares, JPMorgan adding roughly 700,000, and Bank of America adding 550,000 — all building into what was then a weaker tape. Those positions are now sitting on meaningful unrealised gains if held through the May rally.
The story heading into next week is whether the sustained put/call extreme — now at a full-year high despite a strong price recovery — reflects genuine two-way uncertainty or simply the mechanics of a heavily hedged institutional book that hasn't yet been unwound. Shorts have started to cover, but the options market has not followed suit.
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