Put options, credit default swaps surge as investors brace for losses

'Concern spreading across entire AI industry, not just individual firms'

New derivatives let data centers hedge against falling GPU rental rates

A street sign pointing to Wall Street is seen outside the New York Stock Exchange. [Reuters]
A street sign pointing to Wall Street is seen outside the New York Stock Exchange. [Reuters]

As AI stocks swing sharply on big tech earnings and outlooks, Wall Street investors are moving to protect themselves against a sudden collapse in AI asset prices. Skepticism is growing over whether the massive capital pouring into AI can generate commensurate returns — and investors are now hedging against not only falling stock and bond prices but also a potential drop in GPU rental rates.

The Wall Street Journal reported Saturday (local time) that retail investors and tech executives with stakes in AI-related companies are using put options and credit default swaps to guard against investment losses.

Steven Solaka, senior vice president at investment advisory firm Gateway Investment Advisors, said demand for downside protection has grown sharply. Investors who concentrated heavily in large-cap tech stocks and reaped substantial gains are now focused on shielding the value of those holdings, Solaka added.

The push for such "insurance" reflects a string of recent reminders that AI investment is far from a sure thing. Intel's share price plunged 28.6 percent in a single session on Friday, while Alphabet, Google's parent company, fell more than 12 percent on Sunday — its largest single-day drop in history.

Put options are the first line of defense investors have turned to. Trading volume in puts betting on a decline in CoreWeave — an AI cloud infrastructure company — hit a record high last month and has remained elevated since. The most actively traded contracts were CoreWeave puts expiring in 2028 with a strike price of $35; CoreWeave shares were trading at around $55 last week.

CDS premiums on AI-related companies are also being used to spread risk. A CDS premium is the price of a derivative that functions like insurance against a company's failure to repay its debt — the higher the premium, the more actively investors are seeking protection against that company's credit risk.

According to bond data firm Solve, CDS premiums on five major tech companies — Amazon, Alphabet, Microsoft, Meta and Oracle — all rose over the past month, reaching their highest levels since 2021.

Eugene Greenberg, co-founder of Solve, said the across-the-board rise in CDS premiums signals something broader than company-specific credit concerns. "The fact that premiums rose without exception means the market has started to worry about the industry as a whole, not the unique credit situation of any individual company," Greenberg said.

New financial products designed to hedge AI investment risk are also emerging. High-frequency trading firm Jump Trading recently introduced a derivative that can limit losses for data center operators if GPU rental rates fall sharply. Major trading house Susquehanna International Group has also begun offering derivatives to data centers and AI cloud companies seeking protection against declining GPU rental rates.


kate01@heraldcorp.com