Wall Street Ditches Crash Hedges as Investors Chase AI-Driven Upside

The S&P 500 climbed 1.4 % for the week, extending a nine-week winning streak—the longest since 2023. At the same time, the premium investors pay to protect against sharp declines (“skew”) fell to levels last seen in January 2025, and the cost of insuring against a sudden crash reached its lowest point this year. Risk assets posted record closes despite lingering macroheadwinds.

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A “hot” inflation reading pushed the annual gauge to its highest level in roughly three years, while fresh strikes in the Persian Gulf revived concerns about geopolitical risk. Expectations that the Federal Reserve may keep policy tight persisted, yet market participants appeared to price in President Donald Trump’s reluctance to reengage in large-scale combat. Consumer confidence weakened, income growth slipped, and new-home sales fell in April, but the market continued to rally on reports of a tentative U.S.–Iran cease-fire.

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• Skew for ordinary sell-off protection sank to early-2025 lows; the “crash-hedge” premium hit its lowest level of the year.

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• A Goldman Sachs basket of the most-shorted stocks surged more than 30 % over two months.

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• Options on the $68 billion VanEck Semiconductor ETF showed extreme upside demand, with out-of-the-money calls priced at unusually high premiums.

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• SpotGamma data indicate that 20 of the 25 largest Nasdaq constituents now have call prices in the top tenth of their historical range, a level unseen since June 2024.

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Barclays noted that hedge funds and trend-following funds have rebuilt equity exposure, while long-only buying remains muted and retail participation stays light. Market strategists highlighted that the rally is being driven by a narrow group of AI-related winners, prompting managers who previously doubted the rally to “buy back exposure they never had.” The prevailing view is that the market is pricing in the possibility that President Trump will avoid renewed combat operations, with a reversal expected if the cease-fire collapses or oil prices spike sharply.

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Derivatives strategists warned that cheap skew may lull investors into a false sense of security, noting that “a lot of folks think even if we do get a drawdown, it will just be bought.” Others observed that traders are “chasing upside protection” more as a hedge against missing further AI-driven gains than as a pure defensive move.

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• “The market is keying off the fact that Trump does not want to reengage in widespread combat operations,” — Michael O’Rourke, chief market strategist, JonesTrading

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• “A lot of folks think even if we do get a drawdown, it will just be bought. It’s tough,” — Amy Wu Silverman, head of derivatives strategy, RBC Capital Markets

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• “Traders are clearly chasing upside protection, but it is less about indiscriminate call buying and more about paying for exposure to upside tails after being underexposed to the AI-led rally,” — Chris Murphy, co-head of derivatives strategy, Susquehanna International Group

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• “My read is that investors are no longer just hedging downside; many are hedging the risk of missing another leg higher.” — Unnamed market commentator

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No official confirmation of the reported U.S.–Iran cease-fire has been released, leaving the geopolitical backdrop ambiguous. The Federal Reserve’s near-term policy path remains uncertain, and the durability of the AI-driven rally lacks clear forward guidance.

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Analysts caution that a rejection of the cease-fire, a resurgence in oil prices, or a shift toward tighter monetary policy could reignite demand for crash hedges and reverse the current risk-on bias. Conversely, continued moderation in inflation and sustained AI earnings growth may keep downside protection costs low and support further upside-focused positioning.

Bloomberg