The tech sector recently experienced an unexpected selloff, not due to typical economic concerns but driven by shifts in AI-related sentiment. The Nasdaq and S&P both dropped, reflecting a downturn driven by investor reactions to perceived shortcomings in AI advancements, as demonstrated by AMD’s quarterly performance, which failed to meet towering market expectations.
Market Repositioning
This selloff is not about negative valuations but rather a repositioning in the market. The broad reaction affected various sectors as fear spread rapidly, impacting former AI high-flyers and tech firms alike. The real concern is in the software sector, with fears that AI might disrupt current business models and potentially render some services obsolete.
Software companies are particularly vulnerable, as they previously dominated the digital economy with business models centred around recurring revenue. The emergence of AI challenges this dominance, with the potential to displace jobs and disrupt revenue streams. This has led to a broad market reassessment, questioning the relevance and future of traditional software roles in the wake of AI.
While some view this as an existential crisis, it is more about the market’s adjustment to AI’s evolving role. AI is pushing tech companies to demonstrate resilience and actual value, not just visionary narratives. The shift demands proof over possibility, as businesses reevaluate their roles in a rapidly changing technological landscape.
Volatility is the name of the game for the next few weeks. The Nasdaq Volatility Index, the VXN, just touched 35, a level we haven’t seen since the rate hike panic of early 2025. This means option premiums are expensive, so simply buying puts is a costly bet; instead, look to vertical spreads to define risk and cheapen the entry on bearish positions.
Market Discrimination Between AI Players
The market is finally discriminating between AI enablers and those about to be enabled out of business. We saw last quarter how software firms that beat earnings but hinted at AI-driven client efficiencies got punished, a trend that began with whispers in mid-2025. Use this selloff to buy puts on software ETFs or individual names whose products look like a feature a foundational model could swallow whole.
Conversely, the market is betting the value accrues to the foundational model providers and the hardware layer underneath. After seeing NVIDIA’s stock absorb last week’s selloff far better than the software sector, it’s clear where the market sees the moat. We should be looking at call spreads on the big tech platform owners and chip designers, playing for a rebound in the names that are becoming utilities.
This creates a classic pairs trade opportunity for us. Going long call options on the infrastructure giants while buying put options on a basket of application-layer software companies is the cleanest way to trade this narrative. This isolates the AI displacement theme from whatever the broader market and the Fed decide to do next.
The flush-out of speculative assets last week, where crypto and high-growth tech fell in lockstep, shows that this is a broad de-risking event. Looking back, we saw similar coordinated selling during the liquidity crunches of 2025. Short-dated options on high-beta names are now pricing in extreme moves, suggesting the market is braced for more aftershocks.
For years, we’ve watched the implied volatility of software and big tech trade in a tight band, but that correlation is now fracturing. Pay close attention to the skew; the market is pricing in far more downside risk for software-as-a-service companies than for the mega-cap AI platforms. This divergence is the trade itself, signaling a permanent shift in how the market views this ecosystem.
The simple momentum trades that worked all through 2025 are dead for now. The new environment calls for selling expensive premium on vulnerable names and using that to finance long positions on the survivors. This is not about owning the AI theme anymore; it’s about owning the companies that control the AI theme.
