Odd Lots How An Exotic Investment Product Sold In Korea Could Create Havoc In The U.S. Options Market
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Jan 20, 2020 
Benn Eifert, Head of QVR Advisors and expert in volatility and derivatives, dives into the bizarre realm of Korean structured notes, known as 'super lizards' and 'flash lizards.' He explains how these complex investment products, aimed at retail investors, could unleash chaos in the U.S. options market. The discussion also highlights the hidden dangers of banks’ hedging strategies and the risks associated with selling options in volatile markets. Eifert emphasizes the fragility of today's financial landscape and the potential for significant disruptions.
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Hedging Structured Products
- Banks hedge structured product risk using complex models and strategies like selling downside puts.
- Hedging becomes tricky due to the notes' knock-in feature, making precise valuation difficult.
The 2015 China Market Crash and Structured Products
- In 2015, a rapid rally in Chinese markets followed by a crash exposed the risks of structured products.
- Banks had to buy back hedges, creating a short squeeze and impacting markets.
Risky Hedging Strategies
- Banks can try to boost profits by using riskier hedges, like variance swaps.
- This strategy can backfire during market downturns, causing significant losses.