Options traders pile into tech hedges after software rout

The unrelenting selloff in software shares has left tech investors antsy enough that they’re starting to pony up for protection against yet another steep slide.

There’s good reason for the concern. Software stocks plunged again Wednesday, with the Goldman Sachs software basket clocking its seventh straight drop to bring its loss for the year to 19%. The rout bled into broader measures of the tech sector, dragging the Nasdaq 100 down 1.4% so far in 2026.

That uncertainty sent insurance against a 10% drop in the Invesco QQQ Trust Series 1 ETF soaring to the highest level since March 2020 relative to bets on a rally, data compiled by Bloomberg show. Meanwhile, implied volatility in the iShares Expanded Tech-Software Sector ETF is at its highest level since April’s tariff turmoil, pushing up options premiums. 

And while there are signs the selling has become overdone, the ructions in the industry caused by artificial intelligence applications are severe enough that pricing a bottom has become a fraught exercise. 

“The question is how low do you go?” said Michael Bailey, director of research at wealth management firm FBB Capital Partners. “Investors hate software, that’s pretty clear.”

That’s delivered a brutal reckoning for the industry’s heavyweights, most notably Microsoft Corp., Oracle Corp., Salesforce Inc. and Palantir Technologies Inc. They’ve all seen double-digit share declines this year, with investors increasingly worried that AI tools will disrupt their businesses.

Risk-off momentum continued on Thursday, with futures on the Nasdaq 100 Index falling 0.7% at 8:09 a.m. in New York. Futures on the S&P 500 Index traded down 0.4%. 

Then there’s Adobe Inc., the owner of Photoshop and inventor of the .pdf file format. Some investors see its rock-bottom valuation and 20% year-to-date share-price drop as a harbinger of what awaits its peers.

“Adobe, is that the canary in the coal mine?,” Bailey said. “Could the entire software sector trade down to that level? If so, watch out below. That’s a pretty significant risk.”

While insurance against that outcome will soften any blow, Vishal Vivek, a strategist at Citigroup Inc. says the best approach is to put in the work to suss out winners and losers. 

“We are past that stage where you could trade AI as a whole, and you have to start picking your spots,” he said. The old dichotomy of hardware versus software is breaking down. “It’s not even hardware versus software anymore, it’s within hardware memory versus others, semi-cap equipment versus chip makers.” 

For now, investors haven’t seemed to be so discerning. A Goldman Sachs Group Inc. basket of software firms has now lost $2 trillion in value from highs reached last year, a roughly 30% drop. Hedge funds are unwinding their positions too. Software is by far the most net sold subsector year-to-date, according to Goldman’s prime brokerage desk data. Software net exposure finished at a new record low of 4.2% versus 7% at the start of 2026 and historical peak of 17.7% last week.

“Even though software is now in a bear market and has entered oversold territory, no one is stepping in to defend the complex yet and buyers continue to beware,” the bank’s trading desk wrote in a note to clients Tuesday.

Salesforce’s upcoming earnings on Feb. 26 will be a crucial test, Bailey said. If the enterprise software giant beats expectations, that could mark at least a pause in the rout, if not an outright reversal.

Even if Salesforce delivers, there remains the problem that AI may pose an existential threat to some software firms.

“The reality is setting in that we need to find out which of these companies are actually going to outperform and which companies are going to terminal value,” Vivek said. 

This story was originally featured on Fortune.com