Options Market Signals AI Risks Overshadow Federal Reserve Interest Rate Concerns

Equity options markets are signaling that potential disruptions within the artificial intelligence ecosystem pose a greater threat to stock valuations than upcoming central bank policy decisions, CNBC Business first reported.

On Monday, the Cboe VIX Index climbed to 18 as trading volume in options tied to the volatility benchmark surged past twice its 30-day average. The spike in volatility occurred alongside losses in semiconductor and data-center equities, which pulled down the broader S&P 500 Index.

The decline in technology shares followed renewed debates among industry leaders and policymakers regarding the speed of the global AI buildout, specifically addressing concerns over whether infrastructure spending and expansion are moving too fast.

Hedging activity intensified during Monday's trading session. By midday, three of the five most popular VIX contracts bought by traders were call options. The day's largest single transaction saw an investor spend at least $3.6 million on 31-strike call options scheduled to expire in mid-November.

The market reaction stood in contrast to trading on Friday, when the VIX erased two days of increases despite inflation readings that drove the implied likelihood of a Federal Reserve rate hike at this week's meeting up to 90%.

By Friday's market close, S&P 500 options were pricing an expected weekly move of 0.8% for contracts expiring on Sept. 18. Analysis by New York-based options management firm Carrick Lane indicated that this pricing sat below the 50th percentile for expected volatility during weeks containing a Federal Open Market Committee meeting. Earlier in the month, the VIX touched a year-to-date low under 14 despite rising expectations of interest-rate hikes.

"It seems right now people in the equity market think FOMC is decided and care a lot more about AI," John Marshall, principal at Carrick Lane, said in a call. Marshall explained that although tech valuations and rate expectations are traditionally linked as long-duration assets, real-time earnings in AI have shifted focus. "Tech risks and interest-rate risks typically are related because they're long-duration assets but maybe AI's time is right now, profits are right now, so people aren't pricing it as this distant future," Marshall said.

The relative calm in stock markets regarding interest rates comes despite persistent volatility in fixed-income instruments. Mandy Xu, head of derivatives market intelligence at Cboe, noted in a report that the Merrill Lynch Option Volatility Estimate (MOVE) Index—which tracks U.S. Treasury market volatility—rose 10 points last week to hit its 92nd percentile level.

Furthermore, Carrick Lane's research showed options pricing for rate-sensitive funds, including the iShares 7-10 Year Treasury Bond ETF and the Vanguard Real Estate Index Fund ETF, reaching the upper 90th and 80th percentiles, respectively. Despite bond market fluctuations, equity traders appeared largely focused on technology developments, with rate-hike odds surpassing 91% by midday as stock prices stabilized.