"Samsung Electronics and SK hynix Could Halve in a Day"... Wall Street Bets on Crash Risk

With Surging Leveraged ETF Risks,

Wall Street Sees Rapid Growth in "Crash Put" Trading

As leveraged exchange-traded fund (ETF) markets are experiencing explosive growth in global financial markets, risk management strategies surrounding these products are also evolving rapidly.

In particular, it is becoming increasingly noticeable that major investment banks (IBs) on Wall Street are actively utilizing an over-the-counter (OTC) derivative instrument known as the “crash put” to prepare for extreme stock price plunges. While these are ostensibly deployed as hedging strategies, there is growing concern in the market because, in reality, this structure allows the transfer of large-scale loss potential to external investors.

On the afternoon of the 29th of last month, the index was displayed at the Hana Bank dealing room in Jung-gu, Seoul. Photo by Yonhap News.

According to Bloomberg on August 3, the market for leveraged ETFs, which offer two to three times leverage based on single stock names, has been expanding rapidly. Globally, the total assets under management for these ETFs have reached approximately USD 250 billion (about KRW 350 trillion), with over 700 such products listed in the U.S. market alone.

Fueled by this craze for leveraged ETFs, trading in crash put derivatives has also sharply increased. Also called “Cliquet” or “Stability Note,” the crash put is an OTC derivative contract designed to hedge against extreme scenarios in which an underlying stock plummets by about 50% in a single day.

Packaging High-Value Derivatives to Outsource Crash Risk

This instrument was devised for investment banks with total return swap (TRS) contracts with leveraged ETF issuers to avoid “gap risk,” or net asset losses that can arise from sharp price crashes. In this structure, the investor assumes the role of an insurer, betting that the stock price will not be halved in a single day, and receives a high premium (return) in exchange for taking on crash risk. From the perspective of the investment bank, it is a pathway to earn swap fees while outsourcing the fatal tail risk externally.

Demand for such high-risk, high-return derivative products is currently at all-time highs. Natasha Sibley, portfolio manager at asset management firm Janus Henderson, said, “We’ve never seen this kind of demand for these products in the past.” Ramon Verastegui, Chief Investment Officer (CIO) at Kairos Investment Advisors, also stated, “It appears that banks are intentionally expanding the crash put market itself to hedge the mounting risks of leveraged ETFs.”

Focusing on Samsung Electronics, SK hynix... Launch of High-Yield Products

Currently, market attention is especially focused on large-cap technology stocks with relatively high volatility, such as Samsung Electronics and SK hynix. According to documents obtained by Bloomberg, Goldman Sachs offered an annual return of 14.2 to 20.0% to assume the tail risk on 2x leveraged ETFs linked to these two stocks for up to one year as of this May.  According to BNP Paribas, the daily gap put premium for SK hynix rose from 3.5% in March to 6.5% in May, while for Samsung Electronics, it jumped from 2% to 5.5% over the same period.

New York Stock Exchange. Reuters Yonhap News

These levels of return are significantly higher compared to traditional bonds or standard derivatives. For investors, assuming the likelihood of an extreme price collapse is low, this could be perceived as an attractive investment opportunity. However, some warn that caution is needed since these products are asymmetrical in nature: the probability of occurrence may be low, but losses, if realized, can be severely amplified.

“A Classic Recipe for Bad Outcomes” — Warnings Emerge

Experts warn that these trends may exacerbate the complexity and opacity of the financial system. Given that crash puts are OTC products, it is inherently difficult to accurately assess the total trading volume and the amount of risk exposure.

Owen Lamont, portfolio manager at Acadian Asset Management, cautioned regarding crash puts, “There is duplicated and hidden leverage, and having multiple counterparties is a classic recipe for bad outcomes.” In fact, there was a recent case in the United States where the stock price of Lucid Group, an electric vehicle company, plummeted 57% intraday, resulting in the delisting of the associated leveraged ETF.

This content was produced with the assistance of AI translation services.