The options market sends signals: Investor anxiety rises ahead of tech giants' earnings season

Since the rebound of 36% from the low in April, stock market valuations have risen to levels seen during past market frenzy periods, making it easy for investors to find warning signs of "market bubbles."

For most of the past two months, the relative calm in the derivatives market has provided strong evidence to counter such concerns — the Chicago Board Options Exchange Volatility Index has consistently remained well below its long-term average. Even at the individual stock level, the correlation of stock price fluctuations is at its lowest since February, which many market observers see as a sign of market health.

However, this view has recently been challenged: the volatility index has begun to rise, while the correlation of individual stock fluctuations remains low. Derivatives traders believe that a breakout of the volatility index above 17 points indicates that institutional investors are worried — any setbacks in AI-related trades that have driven the stock market up throughout the year could trigger a market-wide pullback.

"One of the key points I’m watching is: when the volatility index diverges from individual stock correlation — even as correlation decreases, the volatility index no longer declines, market sentiment is changing," said Steve Sosnick, Chief Strategist at Interactive Brokers Group. "The current market tension is clearly escalating; investors are buying stocks but are cautious. 'Don't fight the market trend, but be prepared for risk hedging' is the prevailing mindset right now."