Option Traders Boost Bets on Chipmaker Rally as Profit Forecasts Increase

Speculation that U.S. semiconductor stocks will advance has climbed to the highest level since January in U.S. options markets after Texas Instruments Inc. and National Semiconductor Corp. increased earnings projections.

The ratio of puts to sell the Semiconductor Holders Trust exchange-traded fund versus calls to buy tumbled to 1.44 on June 10, the lowest since Jan. 25, after reaching a record 2.66 in April. The most widely owned option on the ETF are August $31 calls, which give the right to buy the shares 8.7 percent above yesterday’s close of $28.53 by Aug. 20.

Investors are raising bets on chipmakers after the largest producers said demand for personal computers and electronics is increasing and semiconductor companies boosted plants to full production. The Semiconductor Industry Association nearly tripled its 2010 sales forecast earlier this month.

“People are unraveling their put protection and shifting to owning calls,” said Joshua Belanger, founder of OptionSizzle.com, a Stamford, Connecticut-based provider of data and analytics. “The growth concerns are diminishing because of solid forward guidance.”

Texas Instruments of Dallas, the second-biggest U.S. chipmaker, said June 8 that sales and profit will be at the upper end of earlier targets, buoyed by demand for industrial machinery. National Semiconductor, the Santa Clara, California- based maker of analog chips that control power in electronic devices, said June 10 that it forecast first-quarter sales of at least $410 million, exceeding the average analyst estimate of $394 million in a Bloomberg survey.

‘Significant Rally’

“If that’s a harbinger for what’s coming from other companies, that could be setting up a significant rally,” said Scott Tapley, who helps oversee $2.5 billion at 1st Source Investment Advisors Inc. in South Bend, Indiana. “Everyone’s been holding their breath about the second half of the year.”

Tapley’s firm has been buying Intel Corp. since the world’s largest chipmaker slumped 6.2 percent in May, he said. Santa Clara, California-based Intel accounts for 23 percent of the semiconductor ETF’s market value.

The Semiconductor Industry Association said June 10 that global microchip sales will rise 28 percent this year on rising demand in China and India. Earlier this month, researcher Gartner Inc. increased its projections for global chip sales to a 27 percent increase this year, compared with a February projection for a 20 percent gain.

Global Sales

The ETF tracking 18 companies climbed 0.1 percent to a five-week high of $28.53 yesterday, extending its gain this year to 2.2 percent. It rose 0.1 percent to $28.55 at 4 p.m. in New York today. SanDisk Corp. has soared 71 percent in 2010 for the biggest gain as the maker of flash memory based in Milpitas, California, benefits from a recovery in prices.

Three ETF members, representing 28 percent of its total market value, will probably report quarterly results before next month’s options expire on July 16, according to data compiled by Bloomberg. They are Intel, Micron Technology Inc. of Boise, Idaho, and Novellus Systems Inc. in San Jose, California.

The higher level of bullishness also may indicate the underlying shares are poised for a pullback, according to Joe Kunkle of OptionsHawk.com.

“Now that the ratio is coming down it shows there is a more bullish sentiment, less protection being bought, so it could be seen as a bearish indication,” said Kunkle, founder of OptionsHawk, a Boston-based provider of options market data and analytics. “It’s showing an overly optimistic sentiment, so the group is over-invested.”

Intel Chief Executive Officer Paul Otellini said at a May 11 meeting with investors that the personal-computer market has stayed “resilient” and the company plans to give “good news” on gross margin forecasts. It reports earnings on July 13.

“Semiconductor stocks are attractive,” said Gus Richard, a San Francisco-based analyst at Piper Jaffray Cos. He cited decreased production capacity. “Demand is definitely going to be solid through the end of the year,” Richard added.

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.

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