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$Vanguard Information Technology ETF(VGT)$ $Technology Select Sector SPDR Fund(XLK)$

After years of lofty valuations and relentless outperformance, technology stocks have finally hit a turbulent patch. As investors watch once high-flying names stumble, the question naturally arises: is this a short-term correction or the start of a deeper downturn? And for those wishing to stay invested yet shield themselves from further pain, what’s the best hedge — buying volatility (VIX) or buying puts on their positions?

In this article, we’ll examine the current state of the tech sector, assess the mechanics and merits of VIX futures and options versus put options, and outline what investors should consider when constructing hedges. As valuations normalize, hedging strategies become essential tools in preserving capital and managing risk.

Tech Under Pressure: Why Hedge Now?

The Nasdaq Composite has dropped nearly 15% from its peak this year, with many once-dominant names falling even more sharply. Apple, Microsoft, and Nvidia have all shed double-digit percentages in the past quarter. The culprit? A combination of hawkish monetary policy, softening demand in key segments like semiconductors and cloud services, and an increasingly cautious investor sentiment amid slowing economic growth.

While long-term investors may view these declines as healthy corrections, the path forward remains uncertain. Inflation is proving sticky, the Federal Reserve remains vigilant, and geopolitical risks — particularly in Asia and Eastern Europe — are adding to volatility. Against this backdrop, investors with concentrated tech exposure face a dilemma: hold on and risk deeper losses, sell and potentially miss the rebound, or hedge their downside.

Hedging allows investors to stay invested while limiting potential losses. But how best to hedge? Two common methods are to buy put options on individual stocks or indices, or to take a position in the VIX, Wall Street’s so-called “fear gauge.”

Understanding the Tools: VIX and Puts

Before diving into strategy, it’s crucial to understand how each instrument works.

VIX Futures and Options: Riding the Fear Wave

The CBOE Volatility Index (VIX) measures expected 30-day volatility implied by S&P 500 options. In periods of market stress, VIX tends to spike, often dramatically. For example, during the March 2020 COVID crash, the VIX soared from 15 to over 80. Investors can gain exposure to the VIX via futures, options, or exchange-traded products like VXX or UVXY.

Importantly, the VIX itself is not a directly investable asset — it’s a calculation. Products tracking it are derivatives, and their value can decay over time, particularly in calm markets where the futures curve remains in contango. Investors using VIX products need to understand roll costs and the potential for significant tracking error over time.

Put Options: Direct Insurance

Alternatively, investors can buy put options on their tech holdings or on broader indices like the QQQ (tracking the Nasdaq 100). A put gives the holder the right to sell the underlying at a specified price (strike) before expiration. This serves as a form of insurance — if the stock falls below the strike, the put increases in value, offsetting some or all of the loss.

Put options can be tailored to specific needs: choosing the strike and expiration lets investors control how much protection they want, and over what time horizon. The trade-off, of course, is cost. Buying puts requires paying a premium, and if the market does not drop enough, that premium is lost.

Current Fundamentals: A Closer Look

So what exactly is driving today’s turbulence, and how does that inform our hedging approach?

Valuations Are Resetting

Even after recent declines, tech valuations remain above historical averages. The Nasdaq 100 is trading at roughly 24 times forward earnings, down from nearly 32 at the 2021 peak but still higher than its 10-year average of around 20. Growth expectations have moderated as cloud, AI, and device markets mature, yet investor enthusiasm — particularly around artificial intelligence — has kept multiples elevated.

Monetary Policy Is a Headwind

The Federal Reserve has kept interest rates higher for longer, citing persistent inflationary pressures. Higher rates disproportionately hurt growth stocks, which rely on future earnings discounted back to present value. As a result, tech stocks, especially those with weaker current cash flows, have felt the brunt of this policy stance.

Earnings Quality Is Mixed

While Big Tech earnings remain resilient, cracks are emerging. Enterprise IT spending has slowed, semiconductor inventories remain elevated, and consumer discretionary tech demand is softening. Guidance for the second half of the year from companies like Intel, AMD, and Salesforce has been notably cautious.

Evaluating the Hedge Options

Armed with a clear understanding of the backdrop, let’s assess the pros and cons of the two main hedging choices.

Why Buy VIX?

The primary advantage of buying VIX-related products is that they tend to respond quickly and disproportionately to market stress. A relatively small allocation to VIX futures or options can deliver large gains when volatility spikes, potentially offsetting portfolio losses. VIX products also hedge against broader market fear, which often coincides with tech sell-offs.

However, VIX hedges are blunt instruments — they protect against general market volatility, not specifically tech declines. If tech underperforms while the broader market holds up, VIX-based hedges may underdeliver. Additionally, the cost of maintaining a VIX position over time is high due to roll decay in futures and high premiums in options.

Why Buy Puts?

Buying put options on the QQQ or specific tech stocks is a more precise way to hedge. Puts on QQQ directly protect against Nasdaq losses, which closely track tech performance. Individual stock puts allow even more targeted hedging, useful for investors with concentrated positions.

The main drawbacks are cost and timing. Put premiums can be expensive, particularly in volatile markets, and if the market does not drop sufficiently before expiration, the hedge expires worthless. Investors must also decide how far out and how far below current prices (out of the money) they want to set the strike, balancing protection and cost.

What the Future Holds: Strategic Considerations

So which strategy should investors favor going forward? The answer depends on portfolio composition, market outlook, and risk tolerance.

If You Expect a Broad Panic

If you believe the next leg down will be driven by broad-based fear — perhaps triggered by geopolitical escalation, a financial crisis, or a sudden Fed misstep — then VIX exposure makes sense. The VIX tends to react explosively in true market panics, providing asymmetric upside.

In this scenario, investors might allocate 2-5% of their portfolio to VIX futures or call options on VIX ETFs. This can serve as a low-cost tail risk hedge while maintaining long exposure to quality tech names.

If You Expect a Controlled Decline

If, instead, you expect a grinding, valuation-driven correction — where tech underperforms but broader markets remain relatively stable — then put options on QQQ or specific stocks are more appropriate. This allows more direct protection against sector-specific risks without paying for exposure to broader market volatility that may not materialize.

For example, a tech-heavy investor might buy three-month puts on QQQ with a strike 5-10% below current levels, rolling them forward as needed.

Implementation Best Practices

Whichever strategy you choose, thoughtful implementation is key. Here are some best practices:

Size the Hedge Appropriately

Hedges are meant to reduce risk, not eliminate it completely. A hedge sized too large can eat into returns if the market remains calm, while one that’s too small won’t provide meaningful protection in a downturn. As a rule of thumb, hedges typically cover 10-30% of portfolio risk.

Mind the Timing

Volatility tends to spike quickly during sell-offs and recede just as fast. Hedging when markets are already panicked can be expensive and less effective. The best time to hedge is when implied volatility is relatively low and market complacency is high.

Monitor and Adjust

Markets evolve, and so should your hedge. Regularly reassess your exposure, adjusting the strikes, maturities, and sizing of your hedges as conditions change. Avoid the temptation to “set and forget” — especially with derivatives that lose value over time.

Conclusion: Key Takeaways

The recent sell-off in technology stocks has rattled investors and served as a reminder that even market darlings are not immune to corrections. For those seeking to stay invested while protecting downside, hedging is a prudent option.

Both VIX-based products and put options offer valuable tools, each with distinct strengths. VIX products are best suited to hedging against sharp, sudden market-wide panics, while put options provide more targeted protection against continued tech underperformance.

Investors should take a disciplined, strategic approach to hedging — sizing positions appropriately, timing entries when costs are lower, and adjusting as market conditions evolve. Ultimately, the right hedge is the one that aligns with your portfolio, outlook, and risk tolerance.

As technology stocks reset and market uncertainty persists, having a well-considered hedging plan can help you weather the storm — and keep you positioned to capitalize on the eventual rebound.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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