JPMorgan’s options trades for a world of Chinese AI outperformance

The equity derivatives strategists at JPMorgan have a plan to benefit from a new phase of the AI trade in which Chinese companies downstream from the picks-and-shovels semiconductor firms pull away from the pack.

“While the US has led in AI infrastructure investment, Chinese tech companies are rapidly advancing AI applications, setting the stage for outperformance,” a group led by Tony SK Lee wrote. “Our strategists and equity analysts expect declining costs in LLM training and inference are unlocking the commercialization of AI-driven services that were previously uneconomical.”

(In March 2022, JPMorgan analysts described Chinese internet companies as “uninvestable,” later saying that word was published in error. What a long way we’ve come…)

They posit that Chinese AI application leaders could deliver the kind of standout earnings growth that the so-called Magnificent 7 cohort of US stocks have been able to generate.

In a separate note, the group unpacked their specific tactic: buying worst-of calls, an options strategy that’s relatively inexpensive to implement, but offers the lowest potential payout in the event of upside in all of the underlying stocks.

“This strategy is ideal for investors aiming to capitalize on the growth potential of AI application leaders while reducing initial costs,” they wrote.

The stocks they suggest for such a basket need to have exposure to the AI theme and liquid options, which include:

• Alibaba: already seeing progress in AI model development; big cloud business

• Baidu: AI-enhanced search

• BYD: DeepSeek-integrated tech architecture

• Tencent: could gain from higher WeChat usage (chatbots)

• Xiaomi: replacement cycles will pick up steam thanks to the advent and progression of AI applications (just don’t ask Apple about that)

• XPeng: looking at AI functionality from the design process to the steering of its vehicles