AI frenzy pushes high-tech stock volatility, Nasdaq risk premium hits highest since internet bubble

As AI trading continues to heat up, the risk pricing between tech stocks and the broader market is experiencing the most extreme divergence since the dot-com bubble.

According to Bloomberg, the ratio of the Cboe NDX Volatility Index, which measures the cost of options on the Nasdaq 100 Index, to the S&P 500 Volatility Index (VIX) has risen to its highest level since 2002, meaning investors are now willing to pay the highest risk premium for tech stocks since the dot-com bubble burst. Although the Nasdaq 100 Index has risen about 30% since the end of March, the sharp volatility has not subsided with the rally; instead, it has continued to amplify.

Before Tuesday's open, Nasdaq 100 futures fell 1.1% at one point, while S&P 500 futures only fell 0.2%, with tech stocks significantly underperforming the broader market. On the same day, SpaceX officially joined the Nasdaq 100 Index, which the market sees as a catalyst that will further push up tech stock volatility. At the same time, UBS's model used to predict the direction of the VIX over the next month has risen to a 10-month high, approaching the key threshold signaling further upside in volatility, as institutional risk aversion continues to heat up.

AI Trading Boosts Tech Stock "Risk Premium"

The Cboe NDX Volatility Index is currently hovering around 27, while the 30-day realized volatility of the Nasdaq 100 Index has risen to 29.7, the highest since the aftermath of Trump's tariff shock last year.

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

Maxwell Grinacoff, head of U.S. equity derivatives research at UBS, described the phenomenon as "quite stunning." He noted that since late last year, when he judged that Nasdaq 100 volatility would persistently exceed that of the S&P 500, this logic has so far held true. In addition, leveraged ETFs in the U.S. and Asian markets have continued to amplify price swings in AI and semiconductor stocks, causing stock price volatility to deviate further from fundamentals.

SpaceX Inclusion Further Amplifies Volatility

The market generally believes that SpaceX's inclusion in the Nasdaq 100 Index will further push up the overall volatility of the index.

Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, said, "Newly listed companies typically have higher inherent volatility, and given SpaceX's current size and market influence, the volatility gap between the Nasdaq 100 and the S&P 500 is likely to remain elevated before SpaceX is eventually included in the S&P 500."

Bloomberg reported that last week, some investors had already positioned for SpaceX's index inclusion, spending about $2 million to buy option contracts that allow them to purchase 1 million shares of SpaceX stock at a strike price of $330, betting on further price increases.

Positions Become More Crowded, Institutions Begin to Strengthen Defenses

Behind the rising volatility is the increasing crowding of AI trades.

Bloomberg-compiled data shows that over the past month, the realized correlation among Nasdaq 100 components has been higher than that of the S&P 500, meaning capital is flowing more concentratedly into a few AI and tech leaders, making the market structure more homogeneous.

Grinacoff noted that multiple types of institutional investors, including hedge funds, systematic strategy funds, and traditional mutual funds, are all chasing the AI sector. "Traditional mutual funds basically need to catch up with their benchmarks." This means that once AI trades start to loosen, the room for institutions to continue adding positions and absorb selling pressure will become increasingly limited, and the market may rely more on retail investors for support.

Meanwhile, UBS's model for predicting VIX direction has risen to a 10-month high, just slightly below the key threshold signaling further VIX upside, indicating that institutions are continuously raising their expectations for future market volatility.

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