Chip stocks bounced back strongly on Monday after a brutal selloff the previous Friday. The Philadelphia Semiconductor Index fell 10.3% last week, wiping out $1.3 trillion in market value. But Monday’s rally saw major names surge 9 to 10 percent. Micron jumped 10% after dropping 13% on Friday. Marvell gained 9%, boosted by news it joined the S&P 500.

Despite the bounce, traders are cautious. They are buying record amounts of put options on the VanEck Semiconductor ETF (SMH). Put options give the right to sell shares at set prices, acting as insurance against further drops. Open interest on SMH puts hit nearly 1.7 million contracts, the highest since the ETF launched in 2011. This shows that many investors want to stay invested but protect themselves against a potential slide.

The volatility in chip stocks has spiked sharply. The implied volatility on SMH sits at 46, more than twice the S&P 500’s volatility index. This gap has created a popular trade among institutional investors: sell expensive semiconductor volatility and buy cheaper broad-market protection. It suggests traders expect swings but are unsure of direction.

What Triggered the Selloff

The selloff last Friday started with Broadcom missing its AI revenue targets by 14%. That shortfall shocked a sector priced for perfection. Nvidia lost 6% and shed about $740 billion in market value. AMD and Intel also dropped double digits. These stocks had run up hard earlier this year—Intel gained 169% and AMD 118% before the drop.

Despite the selloff, chip makers remain optimistic. Nvidia’s CEO said the pullback offers a “chance to buy at a discount” and that AI infrastructure spending is just beginning. Hyperscalers are expected to spend over $600 billion on AI this year. Nvidia’s data center revenue grew 93% year-over-year in the latest quarter, showing strong demand.

Strong Rally but Risks Remain

The VanEck Semiconductor ETF (SMH) surged 77% in five months, far outpacing the S&P 500’s 10% gain. This rally reflects broad demand across chip design, foundry, memory, and equipment sectors. Key players like AMD, Broadcom, Micron, Taiwan Semiconductor, Nvidia, and ASML have driven the surge.

Still, the rally stretched valuations to the point where even a small miss can trigger large drops. The Broadcom revenue miss wiped $1.3 trillion off chip stocks in one day. Investors are wary about how high expectations can be met going forward. The upcoming earnings reports will be key. Any supply chain issues, like problems with advanced memory chips or packaging, could spark sharp moves.

On the broader market, Friday’s decline hit the Nasdaq hard. It fell 4.18%, its worst day since 2025. Investors are also worried about the Federal Reserve keeping interest rates higher for longer. A strong jobs report boosted those fears and pushed money into safer sectors like healthcare and utilities. This rotation adds pressure on tech and chip stocks.

The bond market also reflects this caution. Treasury yields jumped, causing pain for corporate bonds and high-yield funds. Even Bitcoin struggled, falling nearly 7% as traders bought more put options than calls. All of this points to a nervous market balancing between strong tech growth and rising risks.

In short, chip stocks remain at the center of a volatile market. Investors still believe in the long-term AI and data center growth story but are paying a premium to protect against sudden drops. The next few earnings seasons and supply chain updates will likely decide if this rally continues or if the sector faces more pain ahead.