Which matters more to stocks: the bond market or AI risks? The volatility gauge might offer an answer

• The largest VIX trade Monday was a $3.6 million purchase of 31-strike calls expiring mid-November, with three of the top five VIX contracts being calls as AI concerns drove semiconductor stocks lower
• VIX touched a year-to-date low below 14 this month even as rate hike odds climbed steadily, indicating equity markets are 'getting comfortable with higher rates' according to options manager Carrick Lane
• Bond market volatility remains elevated with the MOVE Index at a 92nd percentile high, but this rate volatility is not translating to stock market concerns, as rate hike odds exceeded 91% while equity prices firmed

Summary

Key Development:

Options traders are signaling that AI-related concerns pose a greater threat to U.S. stocks than rising interest rates, according to volatility market signals. The CBOE Volatility Index (VIX) jumped to 18 on Monday as options trading volume surged to more than double the 30-day average.

Market Action:

The VIX spike was driven by semiconductor and data-center stocks declining after renewed debate among tech leaders and politicians about whether AI development is advancing too rapidly. The largest trade of the day involved purchasing at least $3.6 million in VIX 31-strike calls expiring mid-November. Three of the top five VIX contracts bought were calls, indicating elevated concern.

Interest Rate Dynamics:

Despite inflation data pushing Federal Reserve rate hike odds to 91% for the upcoming meeting, the VIX actually erased gains on Friday. The index touched a year-to-date low below 14 this month even as rate hike probabilities climbed, suggesting equity markets have grown comfortable with higher rates.

Sector Divergence:

While bond market volatility remains elevated—the MOVE Index measuring Treasury volatility hit 92nd percentile highs—this isn't translating to stock market concerns. Rate-sensitive sectors show options pricing in the 80th-90th percentiles, but broader equity volatility pricing indicates investors prioritize AI risks over interest rate exposure.

Expert Analysis:

John Marshall of Carrick Lane noted that unlike typical long-duration tech assets, AI profits are materializing immediately rather than in the distant future, decoupling AI stocks from traditional interest rate sensitivity. The market appears to view the Fed decision as settled while remaining highly focused on AI trajectory and risks.