"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 the global financial markets see explosive growth in the leveraged exchange-traded fund (ETF) sector, risk management strategies surrounding these products are evolving in tandem.

In particular, major Wall Street investment banks (IBs) are increasingly utilizing an over-the-counter (OTC) derivative known as the "Crash Put" to prepare for extreme stock price drops. While this is formally a hedging strategy, it is drawing heightened market scrutiny because, in practice, it transfers the risk of large losses 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 News on August 3, the market for 2x to 3x leveraged ETFs based on single stocks has recently grown rapidly. Global assets under management in these products now total approximately $250 billion (about 350 trillion won), with more than 700 such products listed in the US market alone.

Amid the current leveraged ETF boom, trading of Crash Put derivatives is also soaring. Also known as "Cliquet" or "Stability Note," a Crash Put is an OTC derivative contract designed to hedge against the extreme scenario of a nearly 50% crash in the underlying stock within a single day.

High-Value Derivatives Externalize Crash Risks

This product was designed so that an IB, which enters into a Total Return Swap (TRS) agreement with a leveraged ETF operator, can avoid "gap risk"—net asset losses that can occur when stock prices plunge. Investors essentially play the role of insurers, betting that stock prices will not be halved in a day, and in return for assuming this crash risk, they receive high premiums (returns). For IBs, this structure enables them to collect swap fees while outsourcing severe tail risks to external parties.

Demand for these high-risk, high-return derivatives is at a record high. Natasha Sibley, portfolio manager at Janus Henderson, said, "We've never seen demand for this product at this level before." Ramon Verastegui, Chief Investment Officer (CIO) of Kairos Investment Advisors, also remarked, "It appears that banks are intentionally expanding the Crash Put market as a way to hedge the soaring risks associated with leveraged ETFs."

Samsung Electronics and SK hynix Targeted... High-Yield Products Appear

Market attention is particularly focused on large technology stocks with relatively high volatility, such as Samsung Electronics and SK hynix. According to materials obtained by Bloomberg News, Goldman Sachs offered returns ranging from 14.2% to 20.0% for taking on the tail risk of a 2x leveraged ETF linked to these two stocks for up to one year, starting in May.  BNP Paribas’ daily gap put premium on SK hynix rose from 3.5% in March to 6.5% in May, while the premium for Samsung Electronics jumped from 2% to 5.5% during the same period.

New York Stock Exchange. Reuters Yonhap News

These returns are considerably higher than those offered by traditional bonds or standard derivatives. For investors, assuming the premise that the likelihood of an extreme price collapse is low, this can appear to be an attractive investment opportunity. However, there are warnings that this asymmetric structure—where the probability of occurrence is low but losses escalate sharply if it materializes—requires a cautious approach.

“A Classic Combination That Leads to Poor Outcomes” — Warning

Experts warn that this trend could increase the complexity and opacity of the financial system. Because Crash Puts are OTC products, it is difficult to precisely determine transaction volumes and risk exposures.

Owen Lamont, portfolio manager at Acadian Asset Management, cautioned that Crash Puts involve "duplicated and hidden leverage, and the presence of many counterparties is a classic combination that ultimately leads to poor outcomes." In fact, the recent intraday 57% plunge in shares of US electric vehicle company Lucid Group led to the delisting of related leveraged ETFs.

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