Investors who worry about missing the Nasdaq 100's record-breaking rally but also fear a potential bubble in large-cap technology stocks may consider gaining exposure through equity derivatives rather than directly holding the underlying shares, according to Bank of America, in order to limit potential losses if the market suddenly reverses.

Recently, the technology-heavy Nasdaq 100 has continued to set fresh all-time highs even as US Treasury yields have climbed sharply. However, BofA pointed out that this advance has been driven mainly by a small number of AI-related large-cap technology stocks, leaving market breadth narrow and making whether technology stocks are showing bubble-like characteristics a key focus for investors.

BofA strategists Arjun Goyal, Riddhi Prasad and Benjamin Bowler said in a report published on Tuesday: "Low market breadth is a typical feature of the bubble formation process, and this situation usually persists until the bubble bursts."

For investors worried about missing out on the rally and therefore underperforming those fully allocated to the Nasdaq 100, BofA believes options may be a more efficient tool for participation compared with buying the stocks directly. The bank remains bullish on a call option spread strategy on the Invesco QQQ Trust ETF (QQQ.US), which tracks the Nasdaq 100, viewing it as a way to capture potential upside gains while limiting risk exposure.

BofA also said investors can collect premiums by selling protective options against a decline in the Nasdaq 100, and use that income to fund bullish call option positions. However, such strategies involve selling downside protection and may bring additional risks in the event of a sharp market decline, making them more suitable for investors able to manage complex options positions.

BofA ranked 32 types of assets and sectors by degree of bubble formation. According to the bank's "bubble risk indicator," US technology stocks are currently in the highest tier of bubble risk readings. In addition, oil, healthcare and the South Korean stock market also rank near the top of the list. The South Korean stock market is heavily influenced by two major technology companies, SK Hynix and Samsung Electronics.

For more sophisticated traders, BofA also suggested structuring more complex options strategies with dealers, so that if the Nasdaq 100 continues to rise while interest rates keep climbing, the related products can generate returns.