VIX soars to 18, options volume doubles: traders bet "AI risks are scarier than Fed rate hikes"

Zhitong Finance APP has noted that, regarding the two main threats currently facing the US stock market, options traders have made it clear which "beast" is more frightening and has greater potential to disrupt AI trading.

The Chicago Board Options Exchange VIX Index, which measures volatility, surged to 18 on Monday, with options trading volume on this indicator more than doubling its 30-day average. At the same time, semiconductor and data center stocks dragged the S&P 500 Index lower. The weak performance of these stocks stems from renewed debate among technology leaders and policymakers about whether the pace of AI infrastructure development is too rapid.

As of midday, three out of the top five most popular purchased VIX contracts were call options, and the largest trade of the day was someone buying at least $3.6 million worth of call options with a strike price of 31, expiring in mid-November.

Last Friday's situation was almost the exact opposite—despite inflation data pushing the market’s expectations for a Federal Reserve rate hike at this week’s meeting up to 90%, the VIX still gave back two days’ worth of gains. According to analysis published by New York-based options management firm Carrick Lane, as of last Friday’s close, the weekly contract on S&P 500 Index options expiring September 18 was pricing in a volatility move of 0.8%, below the 50th percentile of expected volatility for weeks with FOMC meetings.

This month, as the probability of a rate hike has steadily increased, the VIX once touched a yearly low below 14. John Marshall, head of Carrick Lane, stated that combined with last Friday’s post-inflation data dip in VIX, this suggests the market is gradually adapting to higher interest rates.

Marshall said, “Right now, people in the stock market seem to believe that the FOMC outcome is already decided, so they are focusing more on AI.” “Tech risk and interest rate risk are usually related since tech stocks are long-duration assets, but perhaps the timing for AI is now and profits are now, so people aren’t pricing it in as some distant future event.”

It is notable that interest rate volatility has not disappeared from the broader market. According to a report from Mandy Xu, Head of Derivatives Market Intelligence at Cboe, the MOVE Index, which measures US Treasury volatility, rose 10 points last week, reaching the 92nd percentile.

Similarly, according to Marshall’s analysis, volatility options pricing for interest rate-sensitive investment targets—such as iShares 7-10 Year US Treasury ETF (IEF) and Vanguard Real Estate Index Fund ETF (VNQ)—was above the 90th percentile and 80th percentile, respectively.

However, bond volatility pricing does not appear to be a factor for the stock market. As share prices firmed up on Monday, the probability of a rate hike at Wednesday’s meeting rose to over 91%.