AI investors rush to buy crash insurance after $1T tech wipeout

The AI trade just got a wake-up call. Friday's tech rout torched more than $1 trillion in market value, with the Nasdaq 100 sliding 3.4% and the S&P 500 down 1.8%, according to NBC News. The S&P 500's technology sector bled even harder, dropping more than 4.2%. By Saturday, the Wall Street Journal reported, investors were less interested in how high the rally could climb and more interested in getting out with their winnings intact.

The answer increasingly looks like insurance. Traders and tech executives are loading up on put options — contracts that give holders the right to sell shares at a set price before a deadline, capping losses if things go south. The catch: that protection costs a premium, and the demand is getting expensive to ignore.

Stephen Solaka, a senior vice president at Gateway Investment Advisers, told the Journal he's watching the shift in real time. “We're seeing really significant demand from folks looking to protect downside,” he said. He added that some investors have banked so much from tech stocks that defending those gains now beats chasing more — “these people have made so much money, they're quitting to hedge their stock.” Some employers, he noted, restrict how their staff can trade.

The hedging is showing up in the data. Trading in put options tied to AI cloud player CoreWeave hit record levels in October and stayed elevated, according to Cboe Global Markets. Meanwhile, credit-default swaps — contracts that pay out if a borrower defaults — got pricier for Amazon, Alphabet, Microsoft, Meta and Oracle, hitting their highest level since 2021 over the past month. Eugene Grinberg, co-founder of bond data firm Solve, said there were “no exceptions” in the move, pointing to broad sector-wide nerves rather than trouble at any single company.

Behind the jitters: climbing borrowing costs for data center builds and chip purchases, sinking AI share prices, and a wider market selloff. All of it lands while AI companies keep burning through enormous amounts of capital to fund infrastructure and expansion.

The fear trade is even reaching computing power itself. Jump Trading has started offering contracts that let companies lock in a minimum rental price for Nvidia chips, shielding revenue if demand for AI compute suddenly cools. It all echoes The Big Short, when investors used credit-default swaps to bet against mortgage-backed securities before 2008 blew up. Unlike those traders, though, today's AI shareholders aren't betting on a crash — they're just trying not to lose the fortune they already made.