Wall Street’s Top Trade Themes for 2026, From AI Dispersion to Tech Momentum

As markets push higher, many investors find themselves stuck between two competing forces: the fear of missing out on further gains and growing unease over geopolitical and policy-driven risks. For guidance, some are turning to derivatives strategists at major Wall Street banks, who are offering playbooks designed to navigate today’s complex market environment.

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Several strategies that proved effective during last year’s most turbulent periods continue to attract interest. Many of them are built around managing uncertainty tied to President Donald Trump’s often unpredictable policy shifts. His rhetoric has ranged from questioning the Federal Reserve’s independence to threats involving Iran, Greenland, and potential intervention in electricity markets.

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Looking ahead to 2026, strategists expect the unusual combination of rising equity prices and elevated volatility to persist. Momentum-driven trades, especially those tied to artificial intelligence, remain popular, but they are increasingly shadowed by concerns over stretched valuations. That tension, analysts say, is likely to keep volatility alive even if stocks continue to climb.

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“AI-driven momentum and the US administration’s role as a volatility catalyst are creating a favorable setup,” said Tanvir Sandhu, chief global derivatives strategist. He noted that both equity prices and volatility can rise together, supported by earnings growth, cyclical expansion, and accelerating AI adoption, while fragile market structure and policy risks add instability.

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To position for swings in volatility and headline risk, strategists are promoting a range of derivatives strategies, from traditional tail hedges to more customized dispersion trades.

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Big Tech remains central to the bull case, but options on the Magnificent Seven are far from cheap. According to strategists at Barclays Plc, buying outright call options may not offer the best value. Instead, they favor a “Palladium” structure, which focuses on how dispersed returns are across a group of stocks rather than the overall performance of the group itself.

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This approach targets dispersion among the top 10 stocks in the S&P 500, offering stronger exposure to AI-driven upside while reducing overall volatility risk compared with a straight Nasdaq 100 trade. Barclays suggests purchasing a Palladium position expiring in December, with a 21% strike and a 4% premium.

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“Palladium structures have been popular across hedge funds, pension funds, and asset managers,” said Joseph Khouri, head of equity-derivatives structuring for EMEA at Bank of America. He added that these baskets are often built around thematic views, such as cyclicals versus defensives, winners and losers from rate cuts, or AI and robotics trends.

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As the spot-up, volatility-up pattern becomes more common, strategies designed to benefit from that dynamic are gaining traction. This setup has appeared not only during the AI rally but also in past periods of market exuberance.

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Several banks are recommending upside variance swaps, which pay off when volatility rises while the underlying index remains above a predefined level. These trades tend to perform well when markets rally sharply and then experience a significant drawdown within a specified timeframe.

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Bank of America, JPMorgan Chase, and Barclays are pitching S&P 500 and Nasdaq 100 UpVar swaps with maturities ranging from one to two years. Because these structures focus on upside volatility typically driven by call options they are meaningfully cheaper than traditional variance swaps that rely more heavily on expensive downside protection.

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“With volatility skew still steep and overall volatility relatively low, UpVar pricing remains attractive,” Khouri said. Investors are using these trades in different ways, from shorter-term tactical positions aimed at capturing a spot-up, vol-up scenario to carry trades that combine selling variance with buying upside exposure.

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European banks continue to stand out as a favored regional trade. After a strong rebound in 2025, many strategists believe the sector still has room to outperform in the year ahead. Some strategies focus on lowering the cost of upside exposure, such as buying call options on the Euro Stoxx Banks Index that include knock-out features at higher levels. While these structures are cheaper, they carry the risk of expiring worthless if the index hits the knock-out threshold.

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European mining stocks are also drawing interest. Strategists are highlighting upside opportunities in the Stoxx 600 Basic Resources Index, citing improving fundamentals driven by potential Chinese stimulus and demand linked to AI-related infrastructure. Barclays sees call spreads as particularly appealing, given subdued volatility levels and relatively flat call skews.

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Hedging Big Tech Tails

Much like last April, investors are once again leaning toward buying vega in large-cap tech as protection against sharp selloffs. Barclays strategists argue that “crash volatility” in Big Tech remains an inexpensive hedge against concentrated market leadership and uncertainty around AI capital spending. Geopolitical risks, including concerns about Taiwan, add to the appeal, especially as structural flows keep put option pricing attractive.

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They favor December out-of-the-money puts on Apple and Nvidia. In a similar vein, Bank of America recommends long-dated, deep out-of-the-money Nvidia puts that are delta-hedged, aiming to benefit from a volatility surge if the stock declines.

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VIX Spreads

A recurring debate among investors has been whether macro risks are better hedged with VIX calls or S&P 500 puts. While VIX calls can deliver rapid gains during selloffs, volatility spikes often fade quickly. The steep VIX futures curve also raises holding costs, as higher-priced forward contracts roll down toward spot levels.

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JPMorgan strategists suggest near-term VIX call spreads as a more cost-efficient way to guard against headline-driven shocks while taking advantage of the steep call skew.

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“The VIX looks disconnected from policy risk right now, but that gap could close quickly if tensions escalate,” wrote strategists led by Bram Kaplan. With systematic positioning elevated, a shift in momentum could trigger rapid deleveraging and convex hedging flows, potentially accelerating a market downturn and amplifying volatility.

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