Fears of AI disruption have created an opening for this software options trade

AI Disruption Concerns Present New Software Options Trade Opportunity for Investors

Imagine your favorite video game suddenly changing the rules—just when you think you’re winning, a new challenge appears. That’s what’s happening now in the software investing world, and it’s got everyone’s attention.

Why Investors Should Care

The iShares Expanded Tech-Software Sector ETF (IGV) just took a big hit—over 20% down—making some investors nervous and others curious about opportunity. This matters because tech and software stocks often lead the market, so what happens here can affect your whole portfolio.

What’s Going On?

Many software stocks are falling because people worry that new artificial intelligence (AI) tools, like those from Anthropic and OpenAI, could shake up the industry. Even companies you wouldn’t expect, like travel website Expedia, have dropped because investors fear AI might make old ways of booking trips less important.

  • Expedia fell 15% in just two days.
  • IGV itself dropped almost 5% in a single day, down to $79.27.
  • The five biggest stocks in IGV—Microsoft, Palantir, Oracle, Salesforce, and Applovin—are down an average of 40% from their highs in the last six months.

Bull Case: Reasons to Be Hopeful

  • IGV is now in “oversold” territory, with a Relative Strength Index (RSI) of 14.85. Historically, when RSI dips this low, stocks often bounce back. For example, during the March 2020 market crash, tech stocks with low RSI levels rebounded sharply within months (source).
  • Many top IGV companies have strong balance sheets and long-term growth plans, even if AI changes the game.
  • Some investors use options strategies, like selling puts and buying calls, to define risk and bet on a rebound without risking too much cash upfront.

Bear Case: Reasons to Be Careful

  • AI is advancing fast, and it could really change how software companies make money. Some businesses might not adjust in time.
  • IGV could fall even more if investors keep worrying about AI or if earnings disappoint.
  • Last time tech stocks crashed hard (like in 2008 and 2022), it took months or even years for them to recover fully.
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What’s the Trade?

One strategy mentioned is called a “risk reversal.” Here’s how it works in simple terms:

  • Sell a March 20 IGV $81 put for $3.50 (you get paid for agreeing to possibly buy IGV at $81).
  • Buy a March 20 IGV $83 call for $3.50 (you get the right to buy IGV at $83 if it goes up).
  • This trade costs nothing upfront, but you must be ready to own IGV if it drops below $81.

Investor Takeaway

  • Review your tech and software holdings—big swings like this can be a chance to buy quality companies at a discount, but only if you believe in their future.
  • Watch how AI trends are affecting different sectors, not just software. Travel, finance, and health care could all be impacted.
  • Consider options strategies to define your risk if you want to bet on a rebound, but be sure you understand the risks of owning these stocks if they fall further.
  • Remember, periods of fear can lead to opportunity—but patience and research matter more than luck.
  • Stay diversified. Even if you like tech, don’t put all your eggs in one basket.

For the full original report, see CNBC

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