Major US stock indexes like the Dow Jones, Nasdaq, and S&P 500 have recently declined, partly due to concerns about the tech sector, particularly Artificial Intelligence. CEOs from major banks have cautioned about a potential downturn in US stock markets, discussing possibilities of an AI bubble.

The Federal Reserve’s reluctance for further monetary policy easing has also affected equities. In the past six months, the S&P 500 has surged by nearly 40%, however, doubts persist about the sustainability of this rally.

Federal Reserve Interest Rate Decisions

A 25 basis point interest rate cut was announced by the Fed, with market expectations leaning towards another reduction in the near future. Nevertheless, uncertainties about the Fed’s policies, combined with high inflation rates, have left the market in a precarious position.

Technically, while the S&P 500 has tested lower support levels, the index’s overall upward trend remains intact. Key support levels include 6760, 6490, and 6190, while resistance levels are at 7000, 7250, and 7500. Market conditions may cause the index to fluctuate, but these key levels will be crucial in determining its future path.

With the S&P 500 up nearly 40% since April 2025, markets are showing signs of exhaustion and fear. The CBOE Volatility Index, or VIX, has climbed above 20 for the first time in months, reflecting a growing unease among investors about overstretched stock valuations. We believe this heightened anxiety, particularly around the AI sector, creates a prime environment for volatility trading.

Nasdaq 100 Derivative Trading Strategies

Concerns about an AI bubble are intensifying, and derivative traders should consider defensive positions on the tech-heavy Nasdaq 100. Looking back at the dot-com bust from 2000 to 2002, we remember how the Nasdaq Composite fell nearly 80% after a period of similar hype. Buying protective put options on specific high-flying AI stocks or the QQQ ETF could be a prudent hedge against a sharp correction in the coming weeks.

The technical picture for the S&P 500 provides clear levels for options strategies. With the index testing the 6760 support level, a decisive break below it could trigger a deeper sell-off toward 6490. Traders could position for this by purchasing puts with strike prices below 6760, while a bounce could be played with calls targeting a move back above the 7000 resistance mark.

Uncertainty around the Federal Reserve’s next move is also fueling market jitters. While a rate cut is anticipated for the December 2025 meeting, any hawkish language from Chairman Powell could easily disappoint the market. We can use weekly options that expire shortly after the Fed’s announcement to trade the immediate market reaction to their decision.

Given the S&P 500’s forward price-to-earnings ratio is now sitting above 28, well over its historical average, the risk of a downturn feels more pronounced. Instead of picking a direction, traders can simply bet on increased market turbulence itself. Buying call options on the VIX is a direct way to profit from a potential spike in fear and a broader market decline.

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