Bank of America recommends using options structures to hedge AI and tech bubble risk more intelligently

Overview

This is a Bank of America global equity derivatives and volatility strategy report. Its core theme is that, in an environment where AI and tech stocks continue to rise and bubble-risk indicators are climbing, traditional fixed-strike protection is vulnerable to timing and strike risk, so investors should use more limited-loss option structures with resettable protection or embedded volatility exposure. The report also argues that U.S. tech stocks, Asian AI stocks, and some global thematic trades are showing bubble-like characteristics. In Europe, as the market gradually digests U.S.-Iran-related geopolitical risks, VSTOXX and European bank-related assets may offer opportunities for lower risk premia or catch-up upside.

Core views

First, U.S. tech momentum is extremely strong, with Nasdaq setting multiple new highs in the near term and the NDX up/down realized volatility ratio sitting at an extreme percentile, showing that investors are more afraid of missing upside than of downside. Second, in such a strong-trend and high-uncertainty environment, fixed-strike put protection becomes less effective, making VIX call spreads and QQQ expanding put spreads better hedging tools. Third, European V2X still contains a war-risk premium, and if confidence in a ceasefire or easing tensions improves, V2X could revert toward pre-war averages. Fourth, eurozone banks and Italy's FTSEMIB may benefit from a recovery in risk appetite, and cross-index option structures are better priced than simply holding SX7E calls. Fifth, Asian AI stocks still have upside potential but carry high bubble risk, so the report prefers worst-of calls over direct cash equity exposure.

Analysis framework

The report combines cross-asset stress indicators, bubble-risk metrics, volatility term structure, futures positioning, historical backtests, and option-structure pricing to formulate trading views. Its analysis is not a single fundamental forecast, but rather a comparison of the efficiency of different hedges and upside expressions from the perspectives of price momentum, relative volatility value, risk premium, and option payoff structure.

Methodology notes

• Cross-asset risk monitoringBofA GFSI Risk Landscape

  Global Financial Stress Index

  The GFSI measures changes in stress across asset classes such as equities, rates, FX, credit, and commodities. The report shows that as of 2026-05-08, the global stress index fell to -0.13 from -0.01 on 2026-05-01, placing it in the 31st percentile since 2000, with lower equity stress being the main contributor.

• Bubble-risk identificationBofA Bubble Risk Indicator

  Bubble risk indicator

  The BRI is a price-based indicator ranging from 0 to 1 that combines returns, volatility, momentum, and fragility. A reading of 1 represents extreme bubble-like price behavior, while 0 indicates no bubble characteristics. The report treats around 0.8 as an important bubble-risk threshold.

• Option hedgingMax lookback put and expanding put spread

  A put structure that looks back to the highest price and resets the protection strike

  A max lookback put resets the protection reference price based on the highest underlying price observed during the option's life. An expanding put spread lowers cost by selling a further out-of-the-money put, making it more suitable for scenarios where the market has strong upside momentum but investors still need protection.

• Option payoff structureWorst-of call

  A call option whose payoff is determined by the worst-performing stock in the basket

  A worst-of call uses the weakest-performing stock in the basket as the payoff determinant, so its cost is typically lower than the cheapest single-name vanilla call. The report uses it to obtain limited-loss upside exposure in Asian AI and Korean IT stocks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Nasdaq, NDX, QQQ, U.S. tech stocks

  The core object of bubble-risk and hedging demand

  Strengths

  Strong upward momentum, with Nasdaq setting multiple all-time highs in the past month and the market continuing to buy dips.

  Weaknesses

  BRI is rising, upside realized volatility is extreme, and fixed-strike long-term protection faces timing and strike risk.

  Comparison

  An expanding put spread is better than a standard put in a strong-trend environment because the protection reference price can ratchet higher as the market makes new highs.

  Risks

  If the market keeps rising in a one-way move, hedge premium can drag returns; if volatility falls, long-volatility structures may lose value.

• VIX

  A U.S. equity multi-volatility hedging tool

  Strengths

  Still relatively supported even as U.S. stocks make new highs, and a call spread offers limited-risk exposure with up to 15x payoff.

  Weaknesses

  It requires higher volatility or a risk event; if the market rises steadily, the premium may be lost.

  Comparison

  Compared with directly buying a long-dated fixed-strike SPX put, a VIX call spread is a more direct exposure to volatility shocks.

  Risks

  The maximum loss is the premium paid, and the option can expire worthless if volatility does not rise before expiration.

• V2X / VSTOXX

  A European war-risk-premium normalization trade

  Strengths

  The curve still reflects a war-risk premium, and if ceasefire confidence improves, there is room to fall back toward pre-war levels.

  Weaknesses

  Europe is more sensitive to conflict, energy, and geographic risks, so the risk premium may persist longer.

  Comparison

  VIX has mostly normalized and steepened again, while V2X remains flatter, implying more room for convergence.

  Risks

  If V2X stays above the long put strike or falls below the lower breakeven level, premium may be lost.

• SX7E and FTSEMIB

  An upside expression for a European conflict-resolution scenario

  Strengths

  Eurozone banks have high beta and cyclical exposure, while FTSEMIB has a higher bank weight and strong correlation with European banks.

  Weaknesses

  Selling SX7E puts introduces downside loss risk, which can worsen if European risk appetite deteriorates.

  Comparison

  Compared with a standalone SX7E risk reversal, the FTSEMIB/SX7E cross-index structure improves pricing by using the lower volatility ratio between FTSEMIB and SX7E.

  Risks

  A decline in SX7E can create losses on the short put leg, while the FTSEMIB call leg may lose the value of the premium paid or financed.

• Samsung, SK Hynix, TSMC, Advantest, Samsung Electro-Mechanics

  Upside exposure to Asian AI and Korean IT

  Strengths

  AI themes are driving the move, with SK Hynix and Samsung Electronics up sharply year to date; the WoC structure is cheaper than a vanilla call.

  Weaknesses

  BRI shows that some Korean tech names are close to extreme bubble risk, and any shift in the narrative could trigger a sharp correction.

  Comparison

  A WoC is cheaper and more limited-loss than directly holding cash equity or a single-name call, but its payoff is constrained by the weakest component.

  Risks

  Any underperformer in the basket reduces the payoff; if the AI theme retraces, the maximum loss is the premium paid.

Key data

• Number of Nasdaq all-time highs12 times in the past monthUsed to show that U.S. tech momentum is very strong.
• NDX up/down realized volatility ratio99th percentile since 1985Shows that upside fear is significantly stronger than downside fear in the market.
• GFSI changefrom -0.01 to -0.13From 2026-05-01 to 2026-05-08, global cross-asset stress declined for the fifth time in six consecutive weeks.
• GFSI risk allocatorsuggested 14.6% overweightAs of 2026-05-08, up from 4.9% overweight on 2026-05-01.
• GFSI component mix24.4% bullish, 9.8% bearish, 65.9% neutralAs of 2026-05-08.
• VIX call spreadVIX Jun 25-40 call spread, about $1 cost, up to 15x payoffUsed to gain multi-volatility exposure with limited risk.
• QQQ expanding put spreadBuy QQQ Dec26 90% max lookback put, sell QQQ Dec26 80% vanilla put, cost about 3.57%Aims to reduce strike and timing risk.
• QQQ max lookback breakeven logicBefore year-end, about 8% maximum upside in QQQ is enough to outperform a standard put on a relative basisThis threshold sits in the bottom decile of the largest 7-month upside moves since 2023.
• V2X put ratioJun26 19-17 1x2 put ratio, up to about 4x premium payoffA bet on the normalization of the VSTOXX war risk premium.
• FTSEMIB/SX7E structureSell 1x SX7E 2-month 25d put, finance 2x FTSEMIB 2-month 25d callThe report says this financing ratio is roughly in the 90th percentile of the past 3 years.
• Asian AI WoC trade 13-month 110% Asia AI WoC, cost 2.22%, 59% discount vs the cheapest vanilla call, 90th-percentile historical payoff of 8.0x costUnderlyings include Samsung, SK Hynix, TSMC, and Advantest.
• Korean IT WoC trade 23-month 120% Korean IT WoC, cost 2.71%, 66% discount, 90th-percentile historical payoff of 13.5x costUnderlyings include Samsung, SK Hynix, and Samsung Electro-Mechanics.
• Recent Asian AI gainsSK Hynix up 193%, Samsung Electronics up 137%The report says this is year-to-date performance.
• Historical positive-return frequency of Asian AI WoCTrade 1: 74%, Trade 2: 68%Based on historical scenarios since the start of the Asian AI rally.

Impact & implications

The implication for portfolios is that, if investors remain bullish on AI and tech upside, adding more cash equity exposure directly may face bubble risk and sharp drawdowns, so option-based, limited-loss, and structured expressions should be preferred. If investors are concerned about U.S. tech bubble risk, a VIX call spread or a QQQ resettable protection structure can replace a traditional fixed-strike put. If they expect European geopolitical risk premia to compress, they can express that view through V2X puts and FTSEMIB/SX7E cross-index structures. If they want exposure to Asian AI, a worst-of call can provide cheaper upside participation, but its payoff depends on the weakest name in the basket.

Risks

• The options and structured trades discussed in the report may not be suitable for all investors, who need relevant market experience and the financial ability to absorb losses.
• VIX, V2X, QQQ, and cross-index option structures may lose the entire premium paid.
• Selling SX7E puts is not a fully limited-loss leg; if European banks or the broader market fall sharply, losses may occur.
• Bubble risk in AI and tech stocks has risen, and even a small deterioration in the narrative could trigger a significant pullback.
• Historical backtests and scenario replays do not represent a real account or future performance.
• The research firm may have business relationships with the issuers covered, and investors should be aware of potential conflicts of interest.

What to watch

• Whether U.S. tech stocks and Nasdaq continue to set new highs, and whether the NDX up/down realized volatility ratio remains in an extreme percentile.
• Whether the BofA Bubble Risk Indicator for U.S. tech, semiconductors, Kospi, Nikkei, and Asian AI stocks breaks above or remains above the 0.8 threshold.
• Whether VIX continues to find support in a high-equity environment and whether the VIX term structure is repriced.
• Whether QQQ's year-to-date maximum upside exceeds about 8%, which determines the relative value of the max lookback structure versus a standard put.
• Changes in U.S.-Iran negotiations and ceasefire confidence, and whether V2X falls back toward pre-war high-teens volatility levels.
• The volatility ratio between SX7E and FTSEMIB, European bank futures positioning, and eurozone growth expectations.
• Relative performance of the Asian AI leaders, especially Samsung, SK Hynix, TSMC, Advantest, and Samsung Electro-Mechanics.