Put Options and CDS Surge as Investors Hedge Against AI Stock Declines
Investors are rushing to prepare for declines in AI-related stock prices, driving a surge in trading of defensive financial instruments. According to reports on October 31, investors in AI-related companies are using a variety of financial products to reduce investment risk. Those who have concentrated their holdings in major technology stocks and reaped substantial gains are now bracing for a fall in the value of their holdings. The trend has intensified as shares of some AI-related companies have plunged. Intel's stock fell 28.6% in a single day on October 30. Alphabet also dropped more than 12% the previous day, marking its largest-ever single-day decline.
Put options, which grant the right to sell an asset at a predetermined price, are used to guard against losses from falling share prices or to bet on declines. Trading volume in put options for AI cloud infrastructure firm CoreWeave rose to record levels last month and has remained elevated. Put options on CoreWeave with a strike price of $35 and maturity in 2028 have traded actively, while the stock has hovered around $55 in recent weeks.
There are also signs of wariness about default risk at major technology companies. According to bond data provider Solv, credit default swap (CDS) premiums for five large tech firms—Amazon, Alphabet, Microsoft, Meta, and Oracle—have all risen over the past month, reaching their highest levels since 2021. A CDS is a form of insurance that compensates losses if a company fails to repay its debts. "The fact that CDS premiums have risen across the board suggests market concern about the industry as a whole, rather than company-specific credit issues," said Eugen Greenberg, co-founder of Solv.
A new kind of risk-management demand has also emerged, going beyond share prices and default risk: hedging against declines in GPU rental fees, which affect the profitability of AI infrastructure businesses. High-speed trading firm Jump Trading recently entered derivatives trades designed to reduce losses that data center operators and others could incur if GPU rental fees plunge. Major trading firm Susquehanna International Group has also been receiving inquiries from data centers and AI cloud companies about derivatives trades to hedge against falling GPU rental fees.
In short, while money continues to flow into the growth prospects of the AI industry, demand is simultaneously growing to manage the risks embedded in related companies' share prices, creditworthiness, and business profitability. "There is very strong demand for protection against losses from declines in the value of investment assets," said Stephen Solaka, senior vice president at investment advisory firm Gateway Investment Advisers.
