Options Traders Sell Volatility, Rotate Out of Big Tech After Democratic Midterm Wave

Wall Street roared back to life on Wednesday as investors cheered the outcome of the midterm elections, which produced a Democratic blue wave. The S&P 500 climbed just shy of 2% by midday, erasing the losses it had racked up on Friday and Monday, while options traders responded by selling volatility and rotating away from the big technology trades that have long dominated the market.

The shift in sentiment showed up clearly in options pricing. The Cboe Volatility Index slid roughly four points to below 17, its largest single-day decline since at least July, as traders unwound protective positioning and priced in calmer conditions ahead.

Not every corner of the market joined the rally. Crude oil weakened, with WTI trading below $90 a barrel, and energy stocks sank 5.6% for the steepest sector decline in the S&P 500. Options on the State Street Energy Select Sector SPDR ETF, known by its ticker XLE, traded at more than three times the 30-day average volume, with puts accounting for 57% of the activity and big-money flow concentrated in bearish put buying. The largest trade in the fund was the 62.5-strike put expiring Jan. 15, positioning that SpotGamma data suggest could signal a slow rollover in what has been the best-performing sector of 2026.

The drop in crude fed into a handful of bullish trades tied to inflation and interest rates. Consumer discretionary stocks jumped almost 5%, although options volume in the SPDR sector fund XLY ran below average and was split between puts and calls, according to Cboe LiveVol data.

Some of the most striking action came in housing-related names. Rocket Companies, the mortgage lender and owner of Redfin, had lost almost half its value this year before turning around last month. On Wednesday, options volume in Rocket ran at double the average pace with a strong bullish bias. Of the roughly 110,000 contracts that changed hands, 90% were calls, and more of the trades appeared to be initiated by buyers than by sellers. Bullish traders concentrated their bets in the 14-strike and 16-strike calls expiring Nov. 20.

Solar energy stocks moved in the opposite direction of crude, extending recent gains and building on unusual options activity that had appeared ahead of the midterms. The Invesco Solar ETF, trading under the ticker TAN, added another 9% to reach its highest level since July. Options volume in the fund topped five times the average, with 80% of it in calls. The most popular position was the 48-strike call, a wager on roughly 6% more upside through Nov. 20.

Technology, by contrast, drew skeptical positioning. Options flows turned bearish in the VanEck Semiconductor ETF, known as SMH, which fell 2.6% to its lowest level since May. Volume ran at twice the average, with puts making up 70% of the activity, and the 475-strike put expiring Nov. 13 was the most actively purchased contract.

CNBC contributors Michael Khouw and Brent Kochuba joined host Oliver Renick to break down the day's options action further on Options Action Live.