As the global asset pool of leveraged ETFs approaches $250 billion, major banks supplying swaps and leverage for these funds are increasingly turning to a special class of over-the-counter derivatives—"Crash Puts"—to hedge tail risk during extreme market moves.

According to reports, leading investment banks including Goldman Sachs, Barclays, Citigroup, and BNP Paribas are now active in this market. Demand for these derivatives has surged in lockstep with the rapid expansion of leveraged ETFs this year. Meanwhile, Goldman Sachs has been pitching institutional clients on trades offering annualized returns of 14% to 20%, attracting a growing number of hedge funds and asset managers to act as market "insurers."

However, as the market's size skyrockets, concerns over financial stability are mounting due to the highly customized, opaque nature of these derivatives. Some fund managers warn that the chain of risk transmission—linking leveraged ETFs, OTC swaps, and crash puts—could amplify systemic shocks during extreme events.

Why Crash Puts Are Suddenly in Demand

In essence, a "Crash Put" is an OTC derivative designed to provide banks with tail risk protection. Its emergence stems from the inherent "gap risk" of leveraged ETFs. For instance, with a 2x leveraged ETF, if the underlying stock falls more than about 50% in a single day, the fund's net asset value could near zero, and the bank acting as the swap counterparty may be unable to recover the full loss from the ETF issuer. Crash puts are specifically tailored for such extreme scenarios: banks pay a premium to outside investors, who then absorb losses when the underlying stock suffers an unexpected, severe drop, effectively transferring the tail risk away from the banks.

Ramon Verastegui, founder and CIO of Kairos Investment Advisors, describes this as an efficient "back-to-back" risk transfer tool. Rocky Fishman, founder of Asym Research, likens the return profile to high-yield bonds—investors collect steady, substantial premiums until one day, a single extreme event hits.

The More Leveraged ETFs Grow, the More Banks Need to Hedge

The surge in demand for crash puts is directly tied to the explosive growth of the leveraged ETF market over the past two years. Bloomberg data shows global leveraged ETF assets have now reached nearly $250 billion, with over 700 products listed in the U.S. alone. While U.S. AUM dipped from a June peak of about $200 billion to roughly $160 billion, it remains near historic highs.

High-volatility single stocks, such as SK Hynix, Micron, Nvidia, and Tesla, have become the most popular underlying targets for leveraged ETFs. Fishman notes that the volatility of stocks underlying many 2x leveraged single-stock ETFs is three to five times that of the Nasdaq 100 index, making it harder for banks to manage tail risk compared to even 3x leveraged index ETFs. South Korea's market serves as a concentrated example of this risk. Although the KOSPI has a 30% daily price limit, because crash puts are settled against the official closing price, a string of consecutive limit-down days can accumulate enough losses to trigger significant bank losses. This has prompted South Korean regulators to further tighten restrictions on retail investors trading leveraged ETFs.

High Yields Attract Institutions to Become Insurers

Rapidly growing demand has also inflated the risk premiums on crash puts. BNP Paribas pitch materials show that in May, a single-day gap put option on SK Hynix with a strike price set at 55% of the stock price and a maximum term of six months carried a premium of 6.5%, and a similar product on Samsung Electronics reached 5.5%. Just two months earlier, in March, those premiums were 3.5% and 2%, respectively. Goldman Sachs simultaneously offered clients trades with expected annualized returns of 14.2% to 20% when using leverage.

Natasha Sibley, portfolio manager at Janus Henderson's alternatives team, says this is one of the most robust periods of demand she has seen. "Banks are eager to offload risk, and the rising yields are attracting more and more investors to provide insurance." As the market matures, these strategies are becoming productized. In April, Janus Henderson launched two actively managed structured income ETFs, JELH and JELM, which package institutional-grade structured strategies—using stable swaps and equity-linked notes—into an ETF format, broadening the potential investor base.

Risk Transfer Does Not Mean Risk Disappears

Nevertheless, many industry observers caution that crash puts merely redistribute risk, rather than reducing the overall risk level in the financial system. Because these products are primarily traded OTC, with a lack of transparent public data, it is difficult for the market to accurately assess the total exposure. Owen Lamont, portfolio manager at Acadian Asset Management, warns that history shows the combination of leverage, multiple counterparties, and complex financial innovation often amplifies systemic risk.

According to Asym Research, Barclays, Citigroup, Goldman Sachs, and Bank of America each hold over 10% market share in the U.S. leveraged index ETF swap market. In the leveraged single-stock ETF swap market, Clear Street holds about 20% share, followed by Nomura and Goldman Sachs. As the leveraged ETF universe continues to expand, the network of swaps, crash puts, and other OTC derivatives built around it will only grow. Whether this market effectively disperses risk or amplifies shocks during extreme events is becoming a growing concern for regulators and market participants alike.