Volatility in the options market has signaled that traders view the potential disruption from artificial intelligence as a greater threat to equities than the upcoming Federal Reserve decision. The CBOE Volatility Index, or VIX, jumped to 18 on Monday, with trading volume on its options more than doubling the 30-day average as semiconductor and data center stocks dragged the S&P 500 lower.

Concerns stem from renewed debates among technology leaders and policymakers about whether AI infrastructure is advancing too rapidly. By midday, three of the five most actively purchased VIX contracts were bullish calls, with the day's largest transaction involving a purchase of at least $3.6 million in November-dated calls with a strike price of 31.

Last Friday presented a starkly different picture. Despite inflation data pushing the probability of a rate hike at this week's Fed meeting to 90%, the VIX pared back two days of gains. According to analysis from New York-based options management firm Carrick Lane, as of Friday's close, S&P 500 options priced a 0.8% move for the September 18 weekly expiration, below the 50th percentile of volatility typically expected around FOMC meetings this month.

This month, the VIX touched an annual low below 14 as rate hike probabilities steadily climbed. John Marshall, head of Carrick Lane, noted that the VIX's decline following Friday's inflation data indicates markets are becoming more accustomed to higher interest rates.

"People in the equity market right now seem to think the FOMC outcome is a foregone conclusion, so they care more about AI," Marshall said. "Tech risk and interest rate risk are usually correlated because tech stocks are long-duration assets, but perhaps AI's timing is now, and its profits are now, so people aren't pricing it as a distant future event."

Notably, interest rate volatility has not disappeared from the broader market. According to a report from Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, Inc, the Merrill Option Volatility Estimate (MOVE) index, which measures U.S. Treasury volatility, rose 10 points last week to a high in the 92nd percentile.

Similarly, Marshall's analysis shows that volatility options for rate-sensitive investments, such as the iShares 7-10 Year Treasury Bond ETF (IEF) and the Vanguard Real Estate Index Fund ETF (VNQ), are priced in the 90th and 80th percentiles, respectively. However, bond volatility pricing does not seem to be a consideration for the equity market. As stocks firmed on Monday, the probability of a rate hike at Wednesday's meeting rose to above 91%.