Traders Call Tech-Stock Hedges Pointless as Momentum Builds for More Gains

Options traders have made their stance clear on whether the boom in artificial intelligence stocks is nearing its peak and the answer is a firm not yet. If anything, derivatives activity suggests investors expect more upside in the months ahead.

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That optimism is evident in the options market, where open interest in call contracts tied to the Magnificent Seven mega-cap tech names is once again approaching its highest level since March 2023 when compared to put contracts. In simple terms, traders are positioning for continued gains rather than preparing for downside protection.

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This trend may help calm growing concerns that the powerful tech rally responsible for driving the S&P 500 up 27% since early April is running out of steam. Recently, a growing number of Wall Street strategists have been issuing more cautious outlooks on the sector, citing stretched valuations and aggressive capital-spending forecasts in the AI space. Yet options traders seem confident that momentum will remain intact at least through the start of the new year.

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“Buying tech hedges at the end of the year in the last year or two has been a waste of money,” said Matt Maley, chief market strategist at Miller Tabak + Co. He noted that when the market pushes higher into year-end, institutional investors typically need to keep buying equities regardless of whether they’re fundamentally bullish or bearish.

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The surge in enthusiasm around artificial intelligence has propelled the Bloomberg Magnificent 7 Index up 25% year-to-date and helped Nvidia Corp. become the world’s first $5 trillion company. This elite group which includes Meta Platforms Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Apple Inc., Tesla Inc., and Nvidia has accounted for the majority of the market’s gains throughout the year.

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Even with questions swirling about whether valuations have climbed too far too fast, speculation that the Federal Reserve will deliver an interest-rate cut this Wednesday has softened some of the anxiety. Lower rates generally benefit high-growth technology companies, making future profits more attractive.

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Supporting this shift in sentiment, a measure of expected volatility in tech stocks relative to the broader market has dropped sharply. According to data from Cboe Global Markets Inc., the gauge has fallen from a one-year high of 8% to just 4% over the past two weeks essentially halving expectations for near-term turbulence in the sector.

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On the institutional side, many large investment firms share the view that valuations, while lofty, are not unreasonably stretched. In a Bloomberg News survey of 39 global investment managers, the majority said they do not believe the Magnificent Seven stocks are excessively overvalued. Many pointed to strong fundamentals, such as revenue growth, balance-sheet strength, and dominant market positions, as reasons the rally could represent the early stages of a broader industrial and technological cycle rather than a near-term peak.

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The market’s recent performance reflects that continued confidence. On Tuesday, the Bloomberg Magnificent Seven Index gained 0.3%, marking its 10th positive session in the last 12 trading days. By contrast, the S&P 500 slipped 0.1%, suggesting that investors are still favoring mega-cap tech leaders even as the broader market pauses.

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All eyes are now on the Federal Reserve. Futures markets are currently pricing in an 88% chance of a rate cut later today, according to the latest data. Investors will be listening closely to Fed Chair Jerome Powell’s press conference for any signals about the path of interest rates into 2025. Any hint that policy may continue to ease would likely serve as yet another tailwind for growth-oriented tech companies and potentially extend the momentum in AI-linked stocks.

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For now, the message from the derivatives market is straightforward: traders aren’t treating this AI-driven rally as a fleeting moment. Instead, they’re still leaning into the upside and betting that the sector’s strength has more room to run.

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