The cost of debt default protection for the top five cloud providers has risen to its highest level since 2021, as AI investors rush to seek downside protection.

November 3 - According to The Wall Street Journal, as AI-related stocks and bonds come under pressure, investors, tech executives, and data center operators are seeking downside protection through options, credit default swaps (CDS), and compute derivatives. Stephen Solaka, senior vice president at Gateway Investment Advisers, said demand for hedging against downside risk has increased significantly, with some clients holding concentrated tech stock positions also seeking protection.

On the equity options side, Cboe data shows that CoreWeave-related options trading volume hit an all-time high in October and has remained elevated since. Popular trades include put options expiring in 2028 that pay off if the stock falls to $35, while the stock was trading at around $55 during the week reported.

In credit markets, Solve data shows that the cost of debt default protection for Amazon, Alphabet, Microsoft, Meta, and Oracle rose to the highest level since 2021 over the past month, with Oracle's CDS spread widening by more than 1 percentage point. Solve co-founder Eugene Grinberg believes that the fact that all five companies are affected indicates market concerns are directed at the entire industry rather than individual company credit events.

Compute risk has also begun to become an underlying for derivatives trading. Jump Trading recently established a compute trading division, trading on price differentials between different suppliers while designing over-the-counter derivatives to help clients hedge against the risk of significant declines in future compute prices. For example, operators leasing Nvidia chips can purchase put options, obtaining the right to sell compute at a specified price within an agreed period; trades can also be designed for cash settlement. Silicon Data index shows that Nvidia B300 chip rental prices rose about 56% during the year to $7.56 per hour.

Susquehanna International Group has likewise received hedging demand from data centers and unlisted neocloud providers, including put options linked to compute indices. Companies hope to use this to alleviate lenders' risk concerns and discuss financing arrangements. However, the scale of hedging strategies remains far smaller than the AI trade itself. Jump President Dave Olsen said: "I don't think my house is going to catch fire, but I still buy insurance. You don't have to be bearish to want some insurance."