VIX spikes to 18, options volume doubles: traders bet "AI risk is scarier than a Fed rate hike"

Note that when it comes to the two main threats currently facing the U.S. stock market, traders in the options pit have made clear which "monster" is more terrifying and has greater potential to disrupt the AI trade. The volatility rate measured by the Chicago Board Options Exchange VIX index jumped to 18 on Monday, and options volume on the gauge surged to more than twice its 30-day average, as semiconductor and data center stocks dragged the S&P 500 lower. The weakness in these stocks stems from renewed debate among tech leaders and politicians over whether AI infrastructure buildout is moving too fast. By midday, three of the top five most-bought VIX contracts were calls, and the largest single trade of the day was someone buying at least $3.6 million of calls with a strike price of 31 expiring in mid-November. Friday was almost the exact opposite despite inflation data pushing the market-implied probability of a Fed rate hike at this week's meeting to 90%, the VIX still gave back two days of gains. According to analysis published by New York-based options management firm Carrick Lane, as of Friday's close, S&P 500 index options priced a move of 0.8% for the weekly contract expiring Sept. 18, below the 50th percentile of volatility typically expected in weeks with an FOMC meeting. This month, as rate-hike odds steadily climbed, the VIX briefly touched a year-to-date low below 14. John Marshall, head of Carrick Lane, said that, combined with the VIX's decline after Friday's inflation data, this suggests the market is gradually adapting to higher rates. Marshall said, "Right now people in the stock market seem to think the FOMC outcome is a done deal, so they care more about AI," "Tech risk and rate risk are usually correlated because tech stocks are long-duration assets, but perhaps AI's moment is now, the profits are now, so people are not pricing it as a distant future." It is worth noting that rate volatility has not disappeared from the broader market. According to a report by Mandy Xu, head of derivatives market intelligence at Cboe, the Merrill Lynch Option Volatility Estimate (MOVE) index, which measures U.S. Treasury volatility, rose 10 points last week to a high in the 92nd percentile. Similarly, according to Marshall's analysis, options pricing for rate-sensitive investment vehicles such as the iShares 7-10 Year Treasury Bond ETF (IEF) and the Vanguard Real Estate Index Fund ETF (VNQ) is above the 90th percentile and above the 80th percentile, respectively. However, bond volatility pricing does not appear to have become a factor in the stock market. As stocks firmed on Monday, the market-implied probability of a rate hike at Wednesday's meeting rose above 91%.