“This looks more like a bullish rotation with a derating at its core than the beginning of a broad market deterioration,” said Florian Ielpo, head of macro research at Lombard Odier Investment Management.

So far, the latest selloff has been largely focused on the technology sector, with investors rotating away from the high-flying firms that led the gains this year. Realised 60-day volatility on the US benchmark last week touched the lowest level in more than a year, with the low correlation this year and tendency of zero-day options traders to buy dips and sell rallies helping to restrain moves.

The late-week slide comes in a year that’s been relatively placid. While 2025 saw a cluster of extreme market swings around the tariff tumult in April, in 2026 US stocks have largely shrugged off spikes in oil prices and interest rates.

But even as the technology-heavy Nasdaq 100 capped its worst month since 2025, some investors were betting on a recovery. There were pockets of call and call spread buying seen on Friday on the benchmark indexes and some of the most beaten-down tech names such as Intel.

Options were relatively pricey before the larger gyrations late in the week, with the VIX at the higher end of the range over the past five years compared with 20-day realised swings.

Beyond the AI worries, traders are also eyeing the status of Iran talks, which could determine the trajectory of US military action, and oil prices, after the midterms.

Some investors appeared to be positioning for an end to the war, which has curbed supply from the region for months. Earlier in the week, call spreads were bought in Delta Air Lines, United Airlines and General Electric, all of which would benefit from peace in the Middle East.

“The wild card is still Iran de-escalation and I think we’ve seen positioning for potential for that through some of the call spreads in the airlines and GE,” said Christopher Jacobson, co-head of derivatives strategy, Susquehanna International Group.

The US midterm elections themselves are seen as less important than earnings and the Middle East, with the S&P 500 option market’s pricing of the event risk remaining fairly constant over the past weeks at about a 0.9% move for the following session.

An analysis of midterm election years and market volatility by Brett Friedman, a contributor at Winhall Analytics/OptionMetrics, shows that higher market returns and lower volatility surround midterm elections. However, Friedman notes that in years where control of Congress shifts dramatically, returns are less consistent and more prone to be negative.

With recent inflows from retail investors into leveraged tech exchange-traded funds, moves within semiconductors may be exacerbated by ETF re-balancing flows which buy into rallies and sell into declines to maintain target fund leverage.

The selloff could offer opportunities for some traders to position for a recovery. With hedge funds running low net exposure, positive macro headlines could result in significant upside volatility as investors reposition for a year-end rally.

“With volatility low and hedge funds running limited net exposure, calls offer an attractive way to retain upside exposure into year-end,” said Ielpo.

– With assistance from Bernard Goyder