00:00So just take a step back and tell us what these crash puts are and what purpose they serve.
00:04Sure. Yeah. So these crash puts are a set of exotic options.
00:11And to begin with, like, all these banks or dealers get involved here.
00:15They are manufacturing, right, the leverage for the ETFs.
00:18They are not supposed to take much of the directional bets and need to do the risk management.
00:24But with this rapid bloom of leveraged ETFs, they're facing more pressures, right,
00:28and the risk that tied to the two times fund, especially those like the super volatile and the lines like
00:35SK Hynix and Samsung.
00:37So they have to go to this options contracts to buy insurance.
00:42And this insurance is to protect them against, like, say, something extreme market event.
00:47One day drop of 50 percent.
00:50That is a scenario that could potentially wipe up a two times fund.
00:54Yeah. So our friend Dave Nadig, he calls swaps bar bets with banks.
01:00Basically, it's just it's just the bet with a bank.
01:02The bank's like, OK, I'll give you two X this.
01:03They hedge. The issue isn't the index leverage because those have limit up, limit down.
01:09Like the S&P can't go down more than seven percent.
01:11They also generally are diversified, so they don't move quite as much.
01:14But the real issue is the single stock two X. Right.
01:17Exactly. And there was one this year that actually went down 57 percent.
01:21Lucid. Lucid. Yeah.
01:23So is that a case where the bank kind of has to, like, cash in on that crash put?
01:28Exactly. And I will say a very interesting and nuanced fact about SK Hynix.
01:33Even if people say, oh, 50 percent of SK Hynix,
01:37it is that South Korea market has a 30 percent daily price limit.
01:41Right. But what's interesting with crash puts is that's measured close by close.
01:45So when you have a trading house or the stock has limit down,
01:49whatever is that loss wouldn't be calculated on the day,
01:53it will be rolled over into next session.
01:55So whatever is that could get compound.
01:57So this is to say a 50 percent of when they drop in SK Hynix.
02:02It's very. Yeah, it's it's going to be real, but it's not impossible.
02:06Right. Who is providing the protection to the banks?
02:08Who's selling these products? Yeah, that's a great question.
02:11So I'm hearing hedge funds, asset managers,
02:13or even some cases insurance companies.
02:16So what they're doing is that, OK, they're saying,
02:19yeah, we're going to well house the risk for you.
02:22Right. But this is not free service.
02:24They are getting paid really good yields.
02:27In some cases, I heard that the banks are pitching
02:29as much as 20 percent for them to carry the risk.
02:33As long as, you know, the other side think, OK,
02:36the 50 percent of drop down is not going to happen in one day.
02:40That's something they can grab and collect.
02:42I'm getting a little XIV deja vu, because, you know,
02:45selling VIX futures is being the insurance company, too.
02:48But now there's ETFs that actually are going to benefit or hold crash puts.
02:54Yeah. So that's one I come across with Jenison's Henderson's.
02:59So they are packaging stability notes.
03:01That's another name for these crash puts into their income ETFs
03:06alongside with auto callables.
03:08Because these things essentially feel like structure notes, right?
03:11There's an equity link aspect and then the payoff.
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