U.S. tech stocks have risen too quickly, and investors are starting to panic

According to Zhitong Finance APP, the recent rapid rise of technology stocks has raised concerns among some investors about a potential weakening of momentum. The Nasdaq 100 index maintained an upward trend for most of September, except for one day, after five consecutive months of gains, as investors bet that the AI boom and expectations of interest rate cuts by the Federal Reserve would support the rise of tech stocks. The expected volatility indicator for this index has not shown significant fluctuations for months, while infrastructure software giant Oracle (ORCL.US) saw its stock price soar nearly 36% on Wednesday, reaching a record high and setting the largest single-day gain since 1992.

In response to the ongoing rise, some investors have chosen to lock in year-to-date gains through put options. The "insurance price" for hedging a 10% decline in the Invesco QQQ Trust ETF (the largest ETF linked to the Nasdaq 100) over the next month has risen to the highest level since 2022, relative to the cost of hedging for an equivalent gain.

Greg Boutel, head of U.S. equity and derivatives strategy at BNP Paribas, pointed out that the current market is at a high level with low volatility, presenting multiple reasons for hedging, and September has historically shown seasonal weakness.

From the options market data, the put-to-call skew for QQQ has only been more extreme on 8% of trading days compared to the current level, indicating that the demand for "downside insurance" is approaching panic levels at the 92nd percentile, with put option costs significantly elevated.

Charlie McElligott, a cross-asset strategist at Nomura, emphasized that positions in tech stocks have become crowded, and the larger the sector's gains, the more investors need to hedge against "tail risks." Although demand for call options is relatively subdued, the divergence between put and call options has been further elevated.

In terms of specific hedging actions, Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group, explained that such measures are primarily used to protect long stock portfolios from potential downside shocks. It is important to note that the divergence between put and call options reflects relative costs rather than actual hedging prices, and the current actual hedging costs remain below the peak levels seen during the trade war uncertainty in April.

Although large volatility indicators like the VIX index remain below 16 and have not triggered alarms, market tension has manifested in other areas. For example, on Tuesday, traders spent about $9.3 million buying put options on the SPDR S&P 500 ETF Trust, which would yield profits if the S&P index falls 3.6% before September 19; on Monday, investors invested $13.4 million in long-term hedging contracts to guard against a 58% drop in the S&P index before December 2026.

Data from Bank of America shows that September has historically been the worst-performing month for the stock market, with a 56% probability of closing down since 1927, providing historical justification for the current hedging actions BNP Paribas's Butel compares the current market to 2019—when the Federal Reserve cut interest rates, the stock market saw strong gains in the first half of the year, followed by weakness in the second half.

He advises clients to adopt a "shallow hedge" strategy, which involves purchasing put options with strike prices close to the current price that can pay off with a decline of 3%-5%, rather than the cheaper "deep out-of-the-money" hedge that only becomes effective with extreme declines (such as -20%), to balance cost with immediate protection needs. At the same time, he suggests selling deep put options, believing that more extreme declines are unlikely to occur