Institutional positions are highly concentrated, the market structure is becoming more singular, and risk aversion sentiment continues to rise.

Written by: Li Jia, Wall Street Insights

As AI trading continues to thrive, the risk pricing between technology stocks and the broader market is exhibiting the most extreme divergence since the internet bubble.

According to Bloomberg, the ratio of the Cboe NDX Volatility Index, which measures the cost of Nasdaq 100 index options, to the S&P 500 Volatility Index VIX has risen to its highest level since 2002, indicating that investors are now willing to pay the highest risk premium for technology stocks since the internet bubble burst. Although the Nasdaq 100 Index has risen about 30% since the end of March, the volatility has not diminished with the rise; instead, it continues to amplify.

On Tuesday before the market opened, Nasdaq 100 futures fell by 1.1%, while S&P 500 futures dropped only 0.2%, showing that technology stocks are significantly underperforming the broader market. On the same day, SpaceX was officially included in the Nasdaq 100 Index, which the market sees as a catalyst for further increasing volatility in technology stocks. Meanwhile, UBS's model for forecasting VIX trends over the next month reached a 10-month high, nearing a key threshold indicating further upward volatility, as institutional risk aversion sentiment continues to heat up.

AI Trading Drives Up Technology Stock 'Risk Premium'

The Cboe NDX Volatility Index currently hovers around 27, while the 30-day realized volatility of the Nasdaq 100 Index has risen to 29.7, the highest level since the aftershock of Trump's tariffs last year.

More notably, the ratio of the Cboe NDX Volatility Index to VIX has now reached the highest level in 24 years. This means that, compared to the overall market, investors are willing to pay a higher options premium for technology stocks to hedge against potential risks.

Maxwell Grinacoff, head of US equity derivatives research at UBS, stated that this phenomenon is "quite remarkable." He pointed out that since the end of last year when they predicted that Nasdaq 100 volatility would remain above the S&P 500, this logic has continued to be validated. Additionally, leveraged ETFs in the US and Asian markets have been significantly amplifying the price volatility of AI and semiconductor stocks, causing stock price fluctuations to increasingly deviate from fundamentals.

Inclusion of SpaceX Further Amplifies Volatility

The market generally believes that the inclusion of SpaceX into the Nasdaq 100 Index will further increase the overall volatility of the index.

Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, stated that newly listed companies typically have higher inherent volatility, and given SpaceX's current scale and market influence, the volatility gap between the Nasdaq 100 and S&P 500 is likely to remain high before it is included in the S&P 500.

Bloomberg reported that last week, some investors took positions in anticipation of SpaceX's inclusion in the index, spending approximately $2 million to buy options contracts allowing them to purchase 1 million shares of SpaceX stock at a strike price of $330, betting on further increases in its stock price.

Positions Becoming Increasingly Crowded, Institutions Begin to Enhance Defense

The continuous rise in volatility is backed by the increasing crowding of AI trading.

Data compiled by Bloomberg shows that the realized correlation among Nasdaq 100 constituents has exceeded that of the S&P 500 in the past month, indicating that capital is increasingly concentrating towards a few leading AI and technology stocks, leading to a more singular market structure.

Grinacoff pointed out that various institutional investors, including hedge funds, systematic strategy funds, and traditional mutual funds, are continuously chasing the AI sector. "Traditional mutual funds essentially need to catch up with their benchmarks." This means that once AI trading loosens, the space for institutions to continue adding positions and absorbing selling pressure will become increasingly limited, and the market may rely more on retail funding for support.

At the same time, UBS's model predicting VIX trends has reached a 10-month high, just slightly below the key threshold indicating further upward movement of VIX, showing that institutions are continuously raising their expectations for future market volatility.