Options Market Flashes Rising Fear After a Turbulent Week of Swings

Traders are becoming increasingly uneasy that this year’s stock-market surge may be running out of steam. The S&P 500 just recorded its widest weekly trading range since June, and even Nvidia Corp.’s upbeat earnings  paired with CEO Jensen Huang’s assurances that the artificial-intelligence boom isn’t forming a bubble failed to settle investor nerves. At the same time, Bitcoin has shed nearly a third of its value since reaching a record high last month, and anxiety is rising over how quickly the Federal Reserve will move on rate cuts.

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Despite the S&P 500 holding onto a gain of more than 12% for the year, market participants are increasingly willing to pay up for protection, especially in the tech space. Options tied to the Invesco QQQ Trust Series 1 ETF are trading near their most expensive levels relative to SPDR S&P 500 ETF Trust options since August 2024 a sign of traders trying to lock in profits before volatility climbs further.

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Tech-related fears came sharply into view on Thursday. An early rally fueled by Nvidia’s results evaporated within hours, and the market saw its most dramatic intraday swing since April 8, when tariff-related selling pressure peaked. The Cboe Volatility Index also ended the day at its highest point since April.

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“Whoever bought puts yesterday at the top can retire today,” joked Vuk Vukovic, chief investment officer at Oraclum Capital, a hedge fund active in short-dated options. He added that stretches of market turbulence like Thursday’s drop often work in their favor: “When you’re long volatility and it spikes, that’s when you generate the biggest returns.”

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Vukovic noted that option sellers didn’t step back into the market until Friday, helping push the VIX lower. He expects volatility to ease again heading into the holiday season but predicts there will be one more notable spike before year-end.

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The volatility risk premium the spread between implied volatility and what the market has actually delivered remains elevated, according to Asym 500 founder Rocky Fishman. In a client note, he highlighted that the six-month VIX is rarely priced at such a large premium compared to six-month realized S&P 500 volatility.

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Equity-derivatives strategists at Barclays Plc, including Stefano Pascale, described the latest pullback as “fairly contained.” Still, they found the move “a bit puzzling” given the strength of the economy and robust earnings, particularly among the tech heavyweights.

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In a note last week, they attributed the drop to renewed concerns about an AI-driven bubble and waning optimism among retail traders, especially around rising capital-expenditure expectations. The downturn in tech also overlapped with a steep slide in Bitcoin, which has become increasingly sensitive to moves in the Nasdaq 100 in recent weeks.

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“The correlation is very high with leveraged Nasdaq,” Vukovic said, citing funds such as the ProShares UltraPro QQQ ETF. He added that Wall Street’s options desks now view Bitcoin more as a pure risk asset, a notable shift from the earlier narrative that framed the cryptocurrency as a hedge against volatility.

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Similar to what’s happening in QQQ options, put skew the indicator showing how much investors are paying to guard against downside moves has climbed for the iShares Bitcoin Trust ETF. The fund, known by its ticker IBIT, has seen nearly $2.2 billion in outflows in November after attracting more than $27.6 billion in inflows earlier in the year.

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On Friday, one trader purchased $43 puts on the ETF and financed the position by selling $52 calls a classic risk-reversal strategy designed to hedge against Bitcoin falling below its early-April lows. The structure gives the investor the ability to sell 10 million shares of IBIT should the ETF drop another 9% over the next month, while also leaving them exposed if Bitcoin stages an unexpectedly sharp rebound.

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As the week wound down, some traders began taking profits on earlier bets that volatility would rise, a pattern often seen following large market swings. More than 250,000 VIX December 25/30 call spreads were sold across Thursday and Friday, according to traders. Based on open-interest data, these trades appear to be unwinding positions established in early November.

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“I wouldn’t say people are rushing to monetize hedges if that were happening, the volatility risk premium wouldn’t be this high,” said Fishman, a former Goldman Sachs Group Inc. strategist. “For every investor cashing out protection, there are probably others stepping in to add new hedges at the same time.”

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