Traders are increasingly concerned that this year's U.S. stock rally may be nearing its end, prompting a surge in hedging activities. Despite the S&P 500's year-to-date gain of over 12%, investors are scrambling to lock in profits, particularly in tech stocks. The premium for Nasdaq 100 ETF options relative to SPDR S&P 500 ETF options is near its highest level since August 2024. The S&P 500 recently recorded its largest weekly swing since June.

Strong earnings from NVIDIA (NVDA.US) and CEO Jensen Huang’s reassurance that AI is not in a bubble failed to calm investor nerves. Meanwhile, Bitcoin has lost about a third of its value since hitting an all-time high last month, and expectations for Federal Reserve rate cuts are cooling.

Market jitters resurfaced last Thursday. After NVIDIA’s earnings release, sentiment initially surged but quickly reversed. That day, U.S. stocks saw their largest intraday swing since April 8 (during the peak of tariff-related sell-offs), and the CBOE Volatility Index (VIX) closed at its highest level since April.

Vuk Vukovic, CIO of Oraclum Capital (a hedge fund active in short-term options), quipped on Friday, 「Anyone who bought options at yesterday’s highs could retire today.」 He noted that volatile moments like Thursday’s 「work in our favor,」 as 「when you’re a volatility buyer and volatility spikes, that’s when you make the most.」 He observed that options sellers only began entering the market on Friday, easing the VIX slightly. Vukovic expects volatility to decline again before Christmas but predicts another spike before year-end.

Rocky Fishman, founder of derivatives firm Asym 500, noted that the volatility risk premium (the gap between implied and realized volatility) remains elevated. In a client report, he highlighted that the spread between the six-month VIX and the S&P 500’s six-month realized volatility is rarely this wide.

Barclays equity and derivatives strategists called the recent pullback 「manageable」 but found it 「somewhat puzzling」 given strong economic conditions and robust earnings, especially from mega-cap tech. In a recent report, they attributed the sell-off to AI bubble fears and waning retail investor confidence, alongside capex-related concerns.

Tech’s recent slump coincided with Bitcoin’s plunge. Bitcoin’s sensitivity to the Nasdaq 100 has intensified in recent weeks. Vukovic noted, 「The correlation with leveraged Nasdaq exposure is very high,」 referring to funds like the 3x Long Nasdaq ETF. He added that Wall Street now treats Bitcoin as a pure risk asset, abandoning its former reputation as a volatility hedge.

Like the Nasdaq 100 ETF, the put skew for the iShares Bitcoin ETF (reflecting hedging costs against declines) has risen, signaling investor unease. The fund, which saw $27.6 billion inflows this year, lost nearly $2.2 billion in assets in November. On Friday, one investor bought $43-strike puts funded by selling $52-strike calls—a bet against Bitcoin retesting April lows. This 「risk reversal」 strategy lets traders sell 10 million iShares Bitcoin ETF shares if prices drop another 9% over four weeks, while risking a short squeeze on rebounds.

By week’s end, some traders unwound high-volatility bets, a common post-swing move. Market participants noted over 250,000 December 25/30 VIX call spreads were sold Thursday and Friday, likely closing early-November positions.

Fishman, a former Goldman strategist, remarked, 「I wouldn’t say there’s a rush to cash out hedges—otherwise, the volatility risk premium wouldn’t be so large. While many are unwinding hedges, even more may be adding protection.」