[Edaily Reporter KIM YOON JI ] As leveraged exchange-traded funds (ETFs) gain popularity worldwide, Bloomberg reported on the 2nd (local time) that Wall Street is hedging risk through an unconventional derivative known as a “crash put.”
Bloomberg highlighted the “crash put”—also known as a “clique” or “stability note”—noting, “Although it is difficult to accurately gauge the market’s growth due to its nature as an unlisted over-the-counter (OTC) product, trading in these instruments has been growing rapidly recently.”
Leveraged ETFs track the daily return of the underlying stock by a factor of two or three. To do this, asset managers typically utilize total return swaps provided by banks or non-bank dealers. While the specific contract structure varies by transaction, the dealer provides the ETF with a target daily return. At the same time, the dealer hedges the risk it assumes by trading the underlying stock, futures, or options.
The ETF typically pays the dealer financing costs—comprising the Secured Overnight Financing Rate (SOFR) plus a fixed spread—along with other contractual fees. It provides liquid assets such as cash or U.S. Treasury bonds as collateral, and the value of the swap is marked to market daily.
Even within this structure, banks remain exposed to what is known as “gap risk”—a scenario where the underlying stock crashes in a single day. For a 2x leveraged ETF, losses exceeding its net asset value occur if the stock price falls by more than approximately 50%; for a 3x leveraged ETF, this happens if the price drops by more than approximately 33%. If the ETF manager cannot absorb these losses, the bank that provided the swap may end up bearing the loss.

SK hynix(000660), SamsungElectronics(005930) In the case of leveraged ETFs, if two stocks plunge by more than 50% in a single day, the 2x leveraged ETF tracking those stocks could lose its entire value. While it is extremely rare for a specific stock to plummet 50% in a single day, it is not without precedent. U.S. electric vehicle maker Lucid Group plummeted by as much as 57% during trading on July 14, though it narrowed its losses to 16% by the market close. Subsequently, the leveraged ETF tracking Lucid stock was liquidated.
A “crash put” is a type of insurance that banks use to hedge against such risks. A crash put calculates the likelihood of a sharp decline daily based on a new reference price and utilizes a put option with a very low strike price, ensuring compensation is paid only when the stock price falls significantly below its normal level.
Banks transfer this risk by purchasing crash puts from investors with sufficient assets and risk-bearing capacity. Conversely, investors who sell crash puts receive high premiums in exchange for assuming the bank’s tail risk (a risk with a low probability of occurrence but potentially massive losses if it materializes). The crash put premium (yield) offered by Goldman Sachs in May of this year to investors assuming the risk of a sharp decline in SamsungElectronics and SK hynix for up to one year ranged from 14.2% to 20% annually.
Unlike listed options, crash put options are highly customized products that allow for flexible adjustments to the strike price, expiration date, and settlement terms. Market conditions for the underlying asset and the size of the ETF also influence the price.
As of May, BNP Paribas’ daily gap put options on SK hynix stock offered a premium of up to 6.5%. For SamsungElectronics, the premium was 5.5%. Compared to March, the premium for SK hynix rose by 4.0 percentage points, while that for SamsungElectronics increased by 3.5 percentage points.
Ramon Verastegi, founder and Chief Investment Officer (CIO) of Kairos Investment Advisors, said, “This product is a highly efficient one-to-one risk transfer mechanism,” adding, “That is why banks are currently expanding the crash put market to hedge leveraged ETFs.”
Global assets under management in leveraged ETFs total $250 billion. SK hynix, Micron, NVIDIA, and Tesla are among the popular underlying assets. In the U.S., more than 700 such products are listed.
Meanwhile, concerns are growing in some quarters about the complexity and opacity of these niche products. Owen Ramont, a portfolio manager at Arcadian Asset Management, pointed out, “The presence of duplicate or hidden leverage, along with the involvement of multiple counterparties, is a structure that can typically lead to adverse outcomes.”