Traders are growing increasingly concerned about the sustainability of this year's equity market rally. Despite the S&P 500's 12% year-to-date gain, investors are aggressively locking in profits—particularly in the tech sector—at any cost. The options premium for Invesco QQQ Trust ETF relative to SPDR S&P 500 ETF Trust has surged to its highest level since August 2024, signaling heightened hedging activity.
The S&P 500 just recorded its widest weekly trading range since June. Nvidia's stellar earnings and Jensen Huang's reassurance that AI isn't a bubble failed to calm investor nerves. Meanwhile, Bitcoin has plunged about 30% from last month's record high, and concerns are mounting about the Federal Reserve's rate-cut trajectory.
Tech stocks experienced particularly violent swings last Thursday. Nvidia's post-earnings morning rally quickly reversed, creating the most extreme intraday reversal since April 8. The VIX fear gauge closed at its highest level since April, underscoring market anxiety.
The spike in tech stock hedging costs reflects growing worries about an AI bubble and waning retail optimism, with capital expenditure sustainability becoming a key concern.
Volatility Risk Premium Remains Elevated The risk premium between implied and realized volatility continues to trade at historically high levels. Rocky Fishman of Asym 500 notes that the six-month VIX premium over the S&P 500's six-month realized volatility currently sits at rarely seen highs.
Vuk Vukovic, CIO of hedge fund Oraclum Capital, remains active in short-dated options. He describes last Thursday's market stress as "advantageous—when you buy volatility and it explodes, that's when you get maximum payoff." Joking on Friday, he remarked: "Anyone who bought puts at yesterday's highs could retire today."
Vukovic observed that option sellers only entered the market on Friday, pushing VIX lower. While he expects volatility to compress again before Christmas, he predicts another spike before year-end.
Tech-Bitcoin Correlation Intensifies The recent tech selloff coincided with Bitcoin's collapse, as the cryptocurrency's sensitivity to the Nasdaq 100 has increased in recent weeks. "The correlation with leveraged Nasdaq is extremely high," Vukovic noted, referencing funds like ProShares UltraPro QQQ ETF. Wall Street options traders now treat Bitcoin purely as a risk asset rather than its former reputation as a volatility hedge.
Mirroring QQQ, the put skew for iShares Bitcoin Trust ETF is rising, reflecting costlier downside protection and investor fears of deeper losses. The IBIT fund has seen nearly $2.2 billion outflows in November after attracting $27.6 billion this year.
On Friday, one trader bought IBIT's $43 puts while selling $52 calls to finance the position—a risk reversal strategy hedging against Bitcoin falling below early-April lows. This setup allows selling 10 million IBIT shares if prices drop another 9% over four weeks, but risks forced shorting on any rebound.
The Puzzle Behind the Selloff Barclays derivatives strategists including Stefano Pascale called the pullback "remarkably orderly" yet "somewhat puzzling" given resilient economic data and strong corporate earnings—especially among megacap tech. Their recent report concluded that AI bubble fears and fading retail optimism triggered selling, highlighting capital expenditure concerns.
Later in the week, some traders began unwinding bets on higher volatility—a typical post-selloff move. Market participants reported over 250,000 VIX Dec 25/30 call spreads sold Thursday-Friday, likely closing early-November positions per open interest data.
Former Goldman strategist Fishman observed: "I don't see people rushing to monetize hedges—otherwise we wouldn't have such large volatility risk premia. Among those unwinding protection, there are probably others adding more."
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