Follow-up on Saturday's SMH note

SMH broke out on Monday. Which is fine, and the setup we discussed played. What's actually interesting to me right now is the vol context, and how it changes what shape you'd want to be in from here.

Semis 90-day vol on SMH is back around 35. After the big move earlier this year it was up at 60. Since then the ETF hasn't been going much of anywhere, so vol coming in makes sense.

Here's the bit that gets my attention.

When semis go, they tend to go a long way, as I pointed out last week.

The realised vol on this thing during a genuine trending move is well north of 35. The cheap vol plus a name that historically expands vol when it moves was always the kind of setup where I'd rather own outright optionality.

So... the trade? low-delta calls, three or four months out. Something like the 700 strike into December or January. Not much premium. Gives you leverage if the AI trade revives. Doesn't kill you if it doesn't.

The point of the structure is to be right in a specific way. Long convexity into a name that expands when it moves. If the AI narrative revives, the trend resumes. If it doesn't, the position is small enough to hold through.

That run from March to the high looks like a third wave of some kind, and everything since has looked corrective. Either the ETF breaks lower one more time and puts in a final low, or it revisits the June high directly.

Either path is fine for a long call held out to December or January. Time enough for either pattern to resolve. Cheap enough vol that you're not paying dearly to wait.

Assessing the volatility to figure out the best way to own convexity is one of the skills I teach in my course. You can get a flavour of what else I cover in the masterclass.

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