Chip stocks finally decline, Goldman Sachs trader: cracks are appearing, the market has underestimated the leverage behind the "hype over chips"

Chip stocks show signs of easing recent gains, with Goldman Sachs internally issuing warning signals.

On Wednesday, Goldman Sachs trader Thilo Deller pointed out that the most exuberant sector in the stock market “is beginning to show cracks,” with semiconductor stocks pulling back after recent gains. Meanwhile, Goldman Sachs Managing Director Shawn Tuteja released a briefing, directly highlighting that the market may be severely underestimating the systemic risks accumulated by leverage ETFs in the semiconductor sector.

In the briefing, Tuteja stated that he currently holds a somewhat negative view on risk assets and specifically pointed out a dynamic he believes the market has not fully priced in. As chip stocks soared sharply, the size of leveraged ETFs expanded rapidly, and the resulting “short gamma” exposure has accumulated to an unignorable level. Once the trend reverses, mechanical deleveraging could trigger a chain of sell-offs.

Trigger for chip stocks’ correction: South Korea policy statements cause disturbance

The immediate trigger for this round of semiconductor stock correction came from a statement by South Korea’s policy officials. The South Korean policy chief publicly stated that South Korea should design a national dividend system to return a portion of AI’s excess profits to the public, in order to prevent a K-shaped economy from exacerbating social inequality.

This statement immediately sparked market concerns about the direction of profit distribution policies in the AI industry, causing chip stocks to decline. However, the official later clarified that his intention was merely to suggest using excess tax revenue rather than corporate profits to support redistribution policies. Nonetheless, sentiment in the semiconductor sector has been disturbed, and some of the recent gains have been retraced.

Leverage ETF sizes surge, short gamma exposure doubles

Goldman Sachs data reveal a deeper structural risk. Since late March this year, the Philadelphia Semiconductor Index SOXX has gained over 70%, and leverage products tracking individual semiconductor stocks and ETFs have seen their assets under management grow sharply.

According to Goldman Sachs estimates, these leveraged products collectively hold nearly $100 billion in long semiconductor exposure. The operation mechanism of these products inherently puts them in a “short gamma” state—when the underlying assets rise, they need to buy more; when they fall, they are forced to sell to maintain the targeted leverage ratio.

Tuteja estimates that, for the semiconductor sector alone, these leveraged products need to reset approximately $2 billion in daily gamma exposure in USD. In other words, if the semiconductor sector rises by 1% in a day, the leverage ETF system needs to net buy about $20 billion; if it falls by 1%, it needs to net sell about $20 billion. Notably, this short gamma scale has nearly doubled over the past 6 to 9 months.

Options pricing fails to reflect deleveraging risk

Tuteja pointed out a significant anomaly in options pricing: compared to S&P 500 options, semiconductor options have shown a markedly lower cost of holding over the past year, especially after the rapid expansion of leverage ETF sizes and the continuous upward breakout of spot prices in recent months. This divergence has become even more pronounced.

More concerning is that the left tail pricing of semiconductor options seems to completely ignore the single-day jump risk in a deleveraging scenario. Goldman Sachs’s regression analysis shows that, referencing SMH (semiconductor ETF), 1-month out-of-the-money 10 delta put options are priced at historically low levels relative to at-the-money options; similarly, regressing the 1-month at-the-money option price against 3x 10 delta out-of-the-money puts yields the same result—tail options are undervalued. Under the current leverage scale, this underestimation is especially prominent.

Tuteja’s conclusion is: once the spot price of semiconductors declines, leverage products will be forced into mechanical deleveraging, with the speed depending on daily volatility. The more volatile, the larger the daily deleveraging scale, and current options market pricing clearly underestimates this jump risk.

Based on the above analysis, Tuteja recommends investors consider buying tail hedges in the semiconductor and AI sectors to mitigate potential risks from systemic leverage accumulation, especially given that downside implied correlations have not fully priced in jump risks.

Goldman Sachs specifically favors holding downside puts on SMH, as well as downside protection on its AI leader stock basket GSTMTAIP. Additionally, Goldman Sachs has observed some clients constructing their own semiconductor stock baskets, which tend to have implied volatilities lower than SMH, resulting in lower holding costs during calm market periods. However, in a deleveraging event, their correlation with SMH is expected to remain highly synchronized, providing effective hedging.

Risk warning and disclaimer

        The market carries risks; investment should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.