The impact of AI-related shocks has continuously battered individual stocks in the U.S. market, prompting Wall Street to turn its attention to more complex options and hedging strategies to cope with this unpredictable &#34;whack-a-mole&#34; style sell-off wave.
On Monday, a 10,000-word blog post painted a pessimistic picture of AI eroding consumption by driving up unemployment rates, which subsequently triggered a new round of sell-offs in the software and private equity sectors. Hours later, Anthropic announced that its next-generation Claude Code tool could replace a mainstream programming language, causing IBM's stock to plummet by 13%, marking its largest single-day drop in over 25 years. Jones Trading analyst Mike O'Rourke stated that in such a turbulent market environment, stock picking has evolved into an art of &#34;avoiding landmines.&#34;
Currently, the S&amp;P 500 index has only risen about 1% this year, maintaining relative stability at the index level, but the severe volatility at the individual stock level has created the largest divergence since the global financial crisis of 2009. This &#34;macro calm, micro turbulence&#34; pattern is driving institutional investors to accelerate their deployment of diversified trading and complex hedging tools, with participants ranging from hedge funds to pension funds continuously expanding.
<h2>Index calm cannot hide individual stock tremors, divergence reaches a sixteen-year high</h2>
Barclays analysts pointed out that the S&amp;P 500 index has only risen about 1% since the beginning of the year, with the trading range narrowing to 2.7%, the &#34;narrowest range in nearly a century, except for 1964 and 1966.&#34; However, this macro-level calm conceals the severe volatility at the micro level.
Market maker Citadel Securities noted last week that the gap between individual stock volatility and the relatively stable trend of the S&amp;P 500 index has widened to the widest level since the 2009 financial crisis.
Charles Lemonides, founder of hedge fund ValueWorks, described this phenomenon more vividly: &#34;For years, all stocks moved in lockstep, but recent trends have been extremely volatile in both directions, with swings that are astonishing.&#34;
<h2>Diversified trading heats up, spreading from hedge funds to pension funds</h2>
In response to the aforementioned market structure, &#34;diversified trading&#34; is becoming a hot strategy on Wall Street—this strategy captures the spread profit between significant individual stock volatility and relatively stable index volatility by buying single-stock volatility while simultaneously selling index volatility.
Anshul Gupta, head of quantitative investment strategies at Barclays, stated that the scale of funds chasing diversified trading is &#34;larger than ever before.&#34; He noted that the participation of fast-money accounts (such as hedge funds) has significantly increased, but more importantly, the application of this strategy has far exceeded the hedge fund group, with asset management companies and pension funds becoming increasingly active.
Jason Goldberg, senior portfolio manager at Capstone Investment Advisors and a diversified trading expert, stated that the ratio of short-term individual stock option prices to index option prices has significantly risen, &#34;the options market is telling you that it expects to see a highly dispersed environment.&#34;
Manish Kabra, the head of U.S. equity strategy at Société Générale, also revealed that wealth management clients have recently been inquiring about diversification products, aiming to position themselves between the winners and losers in the tech sector's differentiated market. &#34;There will always be winners; we just don't know who they are, but we want to capture absolute diversified returns,&#34; Kabra said.
<h2>Institutions Accelerate Purchase of Downside Protection, JP Morgan Launches &#34;Triple Edge Hedging Framework&#34;</h2>
Meanwhile, the demand for overall portfolio defense is also heating up. Charlie McElligott, Executive Director of Global Equity Derivatives at Nomura Securities, stated that in the face of a &#34;tsunami of negative catalysts&#34; and the ongoing &#34;market whack-a-mole game,&#34; &#34;the hedging demand from institutional clients has never ceased.&#34;
McElligott revealed that Nomura's clients are accelerating their purchases of put options on the Invesco Senior Loan ETF and iShares High Yield Corporate Bond ETF—both of which include several software companies among their top ten holdings.
This week, JP Morgan strongly promoted its so-called &#34;Triple Edge Hedging Framework&#34; in a client report, specifically designed for investors seeking a &#34;disciplined approach to cope with phase corrections.&#34; The bank recommends buying &#34;convex&#34; short-term S&amp;P 500 put options when market volatility indicators rise—these options appreciate rapidly during sudden market downturns while being more cost-effective during calm periods.
Lisa Shalett, head of the Global Investment Office at Morgan Stanley Wealth Management, pointed out that traders seem to be shorting consumer discretionary stocks while going long on industrial stocks—this &#34;pair trade&#34; reflects an avoidance of signs of weakening consumption and a bet on stocks benefiting from the infrastructure development of large language models.
<h2>Diversification Trading is Not a Panacea, Systemic Risks Remain a Concern</h2>
Despite the current popularity of diversification trading, industry insiders remain vigilant about its potential risks. Jasmine Yeo, a fund manager at Ruffer, warned that if the market encounters a broader systemic shock—such as escalating geopolitical risks or worsening trade wars—leading to a collective decline in individual stocks, diversification trading strategies could face failure risks.
In such a scenario, investors betting on diversification may be forced to buy volatility protection at the index level, which could, in turn, exacerbate selling pressure across the entire market, creating negative feedback. This means that the effectiveness of these &#34;fancy&#34; defensive strategies ultimately depends on whether the AI impact can maintain &#34;structural differentiation&#34; rather than evolve into a &#34;systemic collapse.&#34;

IUSG

The "Whac-A-Mole" style selling pressure from AI has caught Wall Street off guard— the S&P 500 has only risen 1% this year, and beneath the surface calm, individual stock volatility has created the largest divergence since 2009. IBM plummeted 13% in a single day, and software stocks have been hit consecutively, forcing institutional investors to turn to "diversified trading" and other complex hedging tools. However, analysts warn that if systemic risks arise, these defensive strategies may backfire on the market

- The recent impacts of AI have led to significant volatility in individual stocks within the U.S. market, prompting Wall Street to adopt more complex options and hedging strategies.  
- Despite the S&P 500 index showing only a 1% increase this year, the divergence among individual stocks has reached unprecedented levels, driving interest in diversification trading strategies.  
- Institutions are increasingly seeking downside protection, with J.P. Morgan promoting its "Triple Edge hedging framework," but experts warn that these strategies face risks amid broader market shocks.

Wallstreetcn

iShares Core S&P US Growth

VG Mid-Cap Val

Proshares Big Data Refiners ETF

VG Growth

VG S-Cp Grw

Avantis U.S. Small Cap Value

Global X Cloud Computing ETF

Invesco QQQ Trust

VG S&P 500

SPDR S&P 500

iShares Expanded Tech Software Sector ETF

S&P 500

SPDR S&P Software

VG Value

ISHRS Russ 1000 Growth

Avantis US Large Cap Value ETF

Franklin Exponential Data ETF

VG S&P M-Cap 400 Val

VG Mga Cap 300 Grw

iShares Core S&P 500

Schw Us L-Cp Grw

AI is impacting various industries in succession, and Wall Street is turning to "fancy" defense