Rally in chip stocks becomes the most hated in history. Here's the data

The rally in semiconductor stocks is so incredible, traders can't help but bet against it.

Open interest in put contracts on the VanEck Semiconductor ETF (SMH) have surged the past two months to just under 1.7 million, the most ever, according to Bloomberg data going back to the fund's launch in 2011. By comparison, there are just over 500,000 outstanding call contracts.

At the same time, implied volatility in the SMH is rising, nearing 55% Tuesday, near the highest in more than a year. That's a sign that the puts are mostly being bought, according to Zed Francis, chief investment officer at Chicago-based Convexitas.

"People are hedging the move rather than leaning to it," said Francis, who runs a semiconductor options trading strategy on behalf of clients. "We've had this jump-move in the space but it's resulting in hedging activity rather than a chase. So this might be more sustainable than a boom and bust."

Outright bearish speculation may not tell the entire story for the buildup in puts in the sector ETF: the appeal of SMH puts might also be tied to how manic — and expensive — options trading has gotten in single stocks.

Similar to how implied volatility in the chip sector is high compared to the broader S&P 500's 16% vol, implied volatility in single stocks is even higher. That means there may be situations in which traders find it advantageous to use the sector ETF instead of trading in single stocks like Micron, where implied volatility is 105%.

"If you start trading stuff when it's 100 to 120 percent vol with inverted skews, what kind of strategies can you use," Don Kaufman, co-founder of TheoTrade, said in a phone call after the bell. "Implied volatility was just a fever pitch in Micron, so I took the other side in SMH."

Kaufman bought the 535/525-strike put spread in SMH expiring in late August.

"I'm taking a far out-of-the-money shot on it, a 30-delta spread looking for the ultimate pullback," he said. "The squeeze has got to be ending soon. Who in their right mind would want to spend this much on jaw-dropping crap?"