Wall Street AI hedging sentiment heats up, demand for cloud providers' CDS and put options surges

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Wall Street has placed a multi-trillion-dollar bet on artificial intelligence, and now some investors are eager to position for the opposite direction.

Recently, many optimistic expectations have run into a reality check, as companies large and small have failed to meet market expectations. Investors are now studying how to guard against the risk of a sharp market reversal.

Stephen Solaka, senior vice president at Gateway Investment Advisers, said: "A large number of clients want to hedge downside risk."

Anxiety is already showing up in several ways: lenders are demanding higher yields for large data center projects and chip purchases; shares and bonds of heavily indebted AI "neocloud" companies such as CoreWeave have fallen sharply; and popular tech names such as Alphabet and Intel have suffered fierce sell-offs, with some individual stocks posting their largest single-day drops on record. The tech-heavy Nasdaq Composite Index fell 2.9% on Friday, posting its worst monthly performance since March 2025.

Solaka manages client portfolios that are often heavily concentrated in single stocks, including the tech giants that have driven the broader market in recent years. He said a growing number of clients—some of them former employees of these tech companies—want something else: insurance.

"These people have made a lot of money, and now they are setting aside money specifically to hedge the stocks they hold," Solaka added, noting that many companies impose restrictions on employee trading.

Investors and tech executives are turning to options and credit default swaps to hedge.

Trading volume in put options, which give investors the right to sell shares at a specific price at a future date, has continued to rise. Data from Cboe Global Markets shows that the scale of options contracts tied to neocloud provider CoreWeave surged to a record high this month and has remained elevated since.

The most actively traded CoreWeave option is a put expiring in 2028: if the stock falls to $35, the option becomes profitable to exercise. The stock traded around $55 this week.

Meanwhile, data from bond data provider Solve shows that over the past month, the cost of debt default protection for hyperscale cloud providers such as Amazon, Alphabet, Microsoft, Meta and Oracle has risen to its highest level since 2021. "There is not a single exception, which shows the market is worried about the entire sector, not an isolated credit event at an individual company," said Eugene Greenberg, co-founder of Solve.

Oracle's credit default swap spread has moved especially sharply, widening by more than 1 percentage point.

Quantitative trading firm Jump Trading recently set up a compute trading desk. The new business unit is arbitraging the huge price gaps between different service providers, opportunities that are already hard to find in mainstream markets such as stocks and options. The firm is also designing over-the-counter derivatives for clients who want to hedge against a sharp drop in compute prices.

"Market participants are starting to carefully distinguish who the winners and losers are, asking tougher questions, and everyone is digging deeper into business models," said Jump President Dave Olsen.

The logic behind this type of trade is as follows:

The option gives it the right to sell compute at an agreed price before a set date, cushioning the blow to profits, while Jump takes the other side of the position as counterparty. Jump can also negotiate cash-settled contracts, paying cash directly to the service provider; or the trading firm can take on compute leases and sublease them to others to earn the spread.

The Silicon Data index shows that rental prices for Nvidia's B300 chips have jumped about 56% this year to $7.56 per hour. For example, Jump could agree to buy when compute prices fall to $4 per hour.

Olsen and the trading team carefully review counterparties' creditworthiness and assess the likelihood of default.

Major exchanges and trading firms also plan to launch a range of compute derivatives.

Nick Volbi, who heads institutional prediction markets at major Wall Street trading firm Susquehanna International Group, said several data centers and privately held neocloud companies have approached the firm directly or through brokers, hoping to hedge their chip exposure. If compute prices fall because of weaker demand or increased supply, such contracts would pay out, offsetting losses in the buyer's other businesses.

He said these include put options linked to compute indices, products that amount to insurance and can be used to prove to bank lenders that risk is manageable.

"I would go to a potential lender and say, after I buy this structure and get this insurance, can you lend to me? What are the terms?" Volbi said.

There has also been a small amount of trading in prediction markets on states pausing new data center construction. Kalshi has listed contracts betting on which states will halt new data center projects before 2028, including New Hampshire, Michigan and Maine. However, such trading is currently very thin.

Olsen said the overall scale of hedging strategies remains small compared with the main AI trade, and many investors are still bullish.

"I don't think my house is going to catch fire, but I still buy insurance," Olsen said. "Wanting to buy insurance doesn't mean you have to be bearish on the market." news_keyword_pub,usstock,MSFT&AMZN&INTC&.IXIC&ORCL

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