AI Trading Risks Escalate as Demand Surges for "Neocloud" CDS and Put Options

Wall Street has placed trillions of dollars in bets on artificial intelligence, and now some investors are rushing to position themselves for the opposite. So far, this trade has been a consistent winner. Optimism about AI's potential to transform the economy has driven up share prices of tech giants, utilities, and chipmakers, while spawning speculative frenzies in other corners of the market. Recently, many optimistic expectations have run into a reality check, with companies large and small failing to meet market expectations. Now, investors are studying how to guard against the risk of a sharp reversal. Investors and tech executives are turning to options and credit default swaps to hedge. Data from Cboe Global Markets shows that the volume of options contracts tied to new cloud provider CoreWeave surged to a record high this month and has remained elevated since. Meanwhile, data from bond data service provider Solve shows that over the past month, the cost of debt default protection for hyperscalers such as Amazon, Alphabet, Microsoft, Meta, and Oracle has risen, hitting the highest level since 2021.