The tech sector recently faced an unexpected selloff. Rather than being caused by usual economic worries, it stemmed from changes in how investors feel about AI. Both the Nasdaq and S&P saw declines as investors reacted to disappointing AI progress. For example, AMD’s quarterly results fell short of high market expectations.

Market Repositioning

This selloff isn’t fueled by negative valuations but by a shift in market focus. The quick reaction from investors affected many sectors, especially those previously leading in AI. The biggest worry lies in the software sector, where concerns have emerged that AI could disrupt existing business models and make certain services outdated. Software companies are especially at risk. They have thrived in the digital economy with recurring revenue models, but AI’s rise poses challenges. It could lead to job losses and impact their revenue. This has prompted a reassessment of how relevant traditional software roles will be as AI advances. Some see this as a crisis, but it’s really the market adjusting to AI’s growing influence. Tech companies now need to show real value and not just exciting ideas. The demand is for proof of performance in a fast-evolving tech environment. Expect volatility in the coming weeks. The Nasdaq Volatility Index (VXN) recently reached 35, a level we haven’t seen since the rate hike panic of early 2025. This means options are costly right now, so buying puts could be expensive. Instead, consider using vertical spreads to manage risk and lower the cost of bearish positions.

Market Discrimination Between AI Players

The market is starting to differentiate between companies enabling AI and those that might struggle to survive as a result. Last quarter, we noticed that software firms beating earnings while hinting at AI-driven efficiencies faced backlash, a trend that began in mid-2025. Use this selloff to consider buying puts on software ETFs or specific companies whose products may be easily replaced by foundational AI models. On the flip side, the market believes that value will shift to foundational AI providers and the underlying hardware. After NVIDIA’s stock performed significantly better than software stocks during last week’s selloff, it’s evident where the market sees strength. It’s wise to look into call spreads for major tech platforms and chipmakers, anticipating a rebound in these essential companies. This situation creates a classic pairs trade opportunity. By going long on call options with infrastructure giants and buying put options on a selection of application-layer software companies, traders can effectively navigate this trend. This strategy separates the theme of AI displacement from overall market actions and decisions by the Fed. The recent drop in speculative assets like crypto and high-growth tech indicates a broad de-risking. We’ve seen similar coordinated selling during liquidity crunches in 2025. Options tied to high-beta stocks are now pricing in significant fluctuations, suggesting the market is preparing for more volatility. In recent years, we observed a tight correlation between the implied volatility of software and big tech, but that link is now breaking down. Pay attention to the skew; the market is now pricing much more downside risk for software-as-a-service firms than for large AI platforms. This difference indicates a permanent change in how the market views this ecosystem. Simple momentum trades that thrived in 2025 are no longer effective. The current environment calls for selling expensive options on vulnerable companies and using those funds to invest in the more resilient ones. It’s not just about the AI theme anymore; it’s about owning the companies that lead in AI innovation. Create your live VT Markets account and start trading now.

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