Intel Stock Leads Chip Sector Rout as Goldman Sachs Warns of $100B Leveraged Sell-Off Risk

The catalyst for the current pullback in U.S. semiconductor stocks is the South Korean government's proposal to share AI dividends with the public. On Tuesday, Kim Yong-beom, the Presidential Chief of Staff for Policy, proposed a "citizen dividend" mechanism to structurally return excess profits generated by the AI industry to all citizens.

Although Kim later clarified that no new windfall taxes would be levied on corporate profits and that funds would only come from "excess tax revenue" generated by the AI sector, market doubts remain difficult to dispel. With the AI boom persisting, chipmakers' profits have ballooned since 2026. The South Korean government's public expression of concern over wealth distribution imbalances may mean that investors need to factor policy risks into their outlook for chip companies, which could become targets of regulatory scrutiny.

Furthermore, chip stocks have recently accumulated excessive gains, and the impact of the aforementioned news on market sentiment has accelerated the reversal of those gains.

However, according to a Goldman Sachs report, the impact of market news on sentiment is only the superficial reason for the decline in semiconductor stocks. Goldman Sachs highlighted a structural vulnerability within the semiconductor sector: the scale of leveraged products related to semiconductor stocks and ETFs has ballooned since the end of March. Goldman estimates that these products collectively hold nearly $100 billion in long semiconductor exposure.

The issue is that leveraged products possess an inherent "short gamma" mechanism; they must buy more when the underlying asset rises and are forced to sell when it falls to maintain their fixed leverage ratios. This trading mechanism reinforces market direction, further amplifying volatility.

According to Tuteja's estimates, the daily dollar gamma exposure that these leveraged products must rebalance in the semiconductor sector alone is approximately $2 billion. This means that if the semiconductor sector rises by 1%, these leveraged ETFs need to net-buy $2 billion that day; conversely, a 1% decline would necessitate $2 billion in net selling.

Goldman Sachs' concern is that once a trend reversal occurs in the semiconductor market, requiring market makers to sell off semiconductor stocks en masse, it could trigger a chain reaction leading to a market crash.

Tuteja pointed out another noteworthy phenomenon: a clear inversion in options market pricing, where semiconductor options are priced even lower than S&P 500 options. S&P 500 options carry significantly lower risk than semiconductor options, yet investors are paying lower premiums for higher-risk semiconductor assets, which is clearly counterintuitive. The severe undervaluation of semiconductor options is primarily driven by the extremely low cost of semiconductor puts, as the market skews toward a one-sided semiconductor call frenzy.

Furthermore, left-tail pricing for semiconductor options is significantly undervalued. The "left tail" refers to extreme black-swan crashes; left-tail pricing specifically refers to the prices of deep out-of-the-money (OTM) puts designed to hedge against such crashes. Low left-tail pricing indicates that there is virtually no market for options guarding against single-day gap risk. Despite the unprecedented scale of the current options market, tail option prices remain exceptionally cheap, which constitutes the greatest risk.

Tuteja noted that once semiconductor stock prices fall, the effective leverage of products tied to them will spike as asset values shrink, forcing market makers into mechanical deleveraging—namely, selling semiconductor stocks to maintain leverage ratios. The more intense the intraday volatility, the larger the scale of deleveraging, yet the current options market significantly underprices this gap risk.

In light of this, Tuteja suggests that investors consider buying tail hedges in the semiconductor and AI sectors to mitigate the potential risks arising from the accumulation of leverage within the semiconductor industry.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.