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South Korea curbs leveraged ETFs, boosting demand for crash put hedges
Bloomberg reports banks and institutional investors have increased trading of “crash puts” to hedge tail risk tied to 2X and 3X ETFs on highly volatile stocks, with proposed yields for one-year protection ranging from 14.2% to 20%.
Leveraged exchange traded funds that aim to double or triple daily stock returns are coming under tighter scrutiny in South Korea, where regulators have moved to curb retail access amid a period of sharp volatility, according to coverage summarized by LiveMint Markets. The risk has spilled into a niche but growing derivatives trade, as banks that provide the leverage and hold related exposures seek hedges against extreme, one day “tail” moves in fast moving stocks. Bloomberg describes a rise in over the counter transactions involving products sometimes called “crash puts,” as well as terms such as cliquets or stability notes. Bloomberg also cites examples of institutional demand for crash protection linked to South Korean technology names, including SK Hynix and Samsung Electronics. A Goldman Sachs pitch email in May discussed an “Expensive Crash Cliquet” strategy intended to monetize “immense demand” by selling protection to investors, warning that a one day share price drop of 50% or more could wipe out 2X ETFs tied to those stocks. The proposed one year yields for investors assuming that crash risk were described as ranging from 14.2% to 20%. Bloomberg notes that while 50% one day drops are rare for the specific stocks discussed, such moves are not impossible, pointing to a separate example in Lucid Group, which fell as much as 57% intraday before a later levered ETF tied to the company shut down.