Is This How The Smart Money Is Betting On A Market Crash?

Tyler Durden's picture

Instead of allocating capital to expensive tail risk bets on direct asset class collapse (in equities, credit, and commodities), it appears, just as we detailed previously, the 'smartest money in the room' is "betting" indirectly on a stock market crash through eurodollar options.

As we previously detailed, the costs of tail risk protection in credit and equity markets are soaring (and perhaps the crash in global financial stocks and spike in systemic credit risk supports that concerning possibility).


And so traders are looking for cheaper alternatives to place large bets on significant downside in over-inflated assets.

As we noted previously, since the Fed folded in September (under the same conditions that are playing out now), basically admitting it is terrified to raise rates and willing to backtrack due to market fragility, IceFarm Capital's Michael Green explains, it appears many market participants are piling into par Eurodollar calls:

[the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 - basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

When queried whether this is indeed a trade to bet on a market drop, Michael Green responded as follows:

[A reader] thought  this might be an attempt by hedge funds to hedge out their exposure to rising interest rates very cheaply.


My initial idea was that it actually could be a bet on negative rates (if for some reason the Fed had to come back into the picture with QE4).


The bottom line:


"Deep OTM puts on the S&P are very expensive while par ED calls are relatively cheap.


In my view, we are that inflection point where the Fed is going to start to waffle…the bear market beckons and they will not be able to stick with their interest rate guidance. Of course, markets tend to frown on Central Bankers revealed as less than omniscient..."

As the chart makes clear, since the initial exposure of this trade, Open Interest has soared as market fragility, The BoJ's shift to NIRP (and Peter Panic Policy), along with various Fed speakers indirectly hinting at the possibility, as we detailed previously...

The Fed may "seriously consider" negative rates after moving rates back to zero, reintroducing forward guidance and making "stronger pleas" to Congress for fiscal policy action as there are complications for money markets, according to BofAML strategist Mark Cabana.


This would not be a total surprise as Mises Institute's Joseph Salerno warns recent Fed commentary suggests they want to test-drive negative interest rates...


In 2016, the Fed's annual stress test on banks will include a scenario in which the interest rate on the three-month U.S. Treasury bill becomes negative in the second quarter of 2016 and then declines to -0.5%, remaining at that level until the first quarter of 2019.  According to the Fed, "The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities."  In other words, including this scenario in its stress test is not supposed to signal that the Fed is contemplating adopting a deliberate policy of negative interest rates.  It is simply testing the resilience of big banks in the face of  a severe recession that precipitates a "flight to safety" which spontaneously drives rates on short-term Treasury securities into negative territory.  Or so they would have us believe.

Recent remarks by those associated with the Fed, however, seem to suggest otherwise.  For example, former Fed official Roberto Perli, now a partner at Cornerstone Macro LLC, commented "It doesn’t signal anything" about future monetary policy, but then added, it is "another sign that the Fed would not be entirely adverse" to reducing its target rate below zero if economic conditions should warrant.  In mid-January, New York Fed President William Dudley denied that policy makers were "thinking at all seriously of moving to negative interest rates."  However, he conceded, "I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action."  Most tellingly, just this past Monday, Fed Vice Chairman Stanley Fischer gave a talk to the Council on Foreign Relations in New York in which he approvingly discussed negative interest rates in some detail.  Because a speech by a Fed Vice Chairman sometimes turns out to be a bellwether of a radical shift in monetary policy--recall Bernanke's infamous speech on deflation and unconventional monetary policy in November 2002--Fischer's remarks are worth quoting:


[W]e believed that we could not get interest rates to go below zero. Well, it turns out that . . . four European and one Asian country have now done that. And how can you do that when currency has a zero rate of return? You can do it because it turns out that holding currency is not so easy. If you’re going to keep your billion dollars in currency, you’re going to have to find a place to store it, you’re going to have to insure it, and you’re going to have to have it guarded. And by the time that’s done . . . zero is no longer the lower bound. All those costs are the lower bound, and those costs seem to be significantly below zero in the sense that we have a Denmark and one other country having a negative 75 basis point interest rate, which worked. . . . So that idea is there. And that’s what they’re pursuing. And, you know, everybody is looking at . . . how that works. . . .  [W]e have actual experience of countries that have used negative interest rates. . . . Countries that have used it continue to use it. They haven’t given it up. . . . So it’s working more than I can say that I expected in 2012. . . .


And, lest we forget, Fed Chairman Yellen went on record as conditionally favoring negative interest rates as President of the Federal Reserve Bank of San Francisco in 2010:


If it were positive to take interest rates into negative territory I would be voting for that. 

And then, of course, there is this...

“I think negative rates are something the Fed will and probably should consider if the situation arises”. Former Fed Chairman Ben Bernanke

So simply put - instead of paying up for expensive bets on dramatic equity downside, "smart money" traders are thinking cause and effect - what would it take to get The "data dependent" Fed to go NIRP?

A stock market crash, because they certainly don't give a crap about the economic data, and thus - buying Par Eurodollar calls is a 2nd order trade on a looming stock market crash - and is a lot cheaper than the record high skews in equity options markets:

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KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Feb 6, 2016 1:03 PM

The 'SMART MONEY', had a tragic boating mishap this past summer & is now investing in snorkels & skin diving gear.

Deathrips's picture

Watch that GBP to USD.....

WTI lower lows on deck....



KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Deathrips Feb 6, 2016 1:56 PM

Yeah, I'll be watching that like a 'hawk' to try and frontrun those HFT algos with my 14.4k modem & make me some more counterfeit scratch!

38BWD22's picture



The article is too complicated for us simple folk.

I am not "Smart Money", but gold is cheap, and will help hedge through a scary stockmarket decline.  Gold is also NOT too complicated.  Just buy it and hold.

manofthenorth's picture

I'm with you Do chen, I tend to stick with simple things that I understand and therefor trust.

The no counter party risk aspect of PMs seals the deal for me.

I like silver better though ;-)

BaBaBouy's picture

The "Psychic" In Me Is Whispering GOLDie 2200. Trading is getting rather "Near" ...

Heavy resistance at 2300... RECORD Amounts To trade in that range, and then LOOK OUT Above...

Watch Monet, Van Gogh and Renoirs etc GO Also...

FED Nirpy, and rudderless...
HOT QE Money orphanned with nowhere to go...
Hedgie Fund Casinos closing shop Daily...
Soros Running out of Ideas...
LONDON PM's Fixes Looking Like Bizzaro-World...

PM's Paper Markets depleated of PHYS backup...

Need More ???


Save_America1st's picture

Pull up a daily chart for gold and add 50, 100, and 200 day moving average lines to it. is a good one to use.

Notice the pattern?  Gold was "allowed" to blow away it's 200 day moving average over the last few days by nearly 45 bucks.  Each time gold has been allowed to close above the 200 day moving average line the Cartel has destroyed it over the next weeks. 

Interestingly...the last time gold was allowed by the Cartel to kick this much ass above the 200 day moving average was exactly 1 year ago when it shot up to 1300/oz.  After that?  Gold was consistently hammered for the next 8 weeks until it hit a low of 1150 in Mid-March 2015. 

Since the Crimex manipulates the paper market 100% of the time both up and down, then I think we should all expect to see this same type of pattern continue...sit back...wait it out...and keep buying the dips little by little.

Same thing goes for paper silver.  Pull up the same daily chart w/ 50, 100, and 200 day moving average lines and you'll see the same thing.

Yesterday's close for silver at just 15 puts it about .10 cents under the 200 day moving average line.

I'd expect them to let it break that line next week and then begin with the monkey hammers for both gold and silver.

I hear Chinese markets are closed ALL next week for holiday.  Perfect opportunity for the Crimex to fuck w/ the paper PM's all they want w/out any competition from China.

Silver might end up back down around 14/oz by end of next week unless something crazy happens to counteract the trend.

Check that charts and you will see.  I'm sure we'll see record highs eventually for silver and gold...until then, keep stacking on the dips and increase that phyzz stack at these hisorically LOW fiat valuations!

Number of ounces held in your possession will be what matters in the days ahead, folks. 

BaBaBouy's picture

Check out the moves in PM's Stocks on the TSE... ABX PAA IMG K YRI ...

ABX has doubled from its low.

I don't know if this is the BIG start, but a lot of Stars have alligned now for AU and AG and PL.

Watching for this 1 More Signal.............
Miners getting bought up by Foreign entities(with premiums).
This would confirm it for me...

old naughty's picture


couldn't get to, do you have the full link?

Durrmockracy's picture
Durrmockracy (not verified) old naughty Feb 6, 2016 11:43 PM

So if this is how the "smart money" wants to play the collapse, what are ZH'ers doing then ROTFL?

Ya know, because the people here think that the entire e-commerce revolution was "a ponzi" and we are going back to the days of sending cheques through the mail....

PT's picture

It's one thing to know what to do.
The next thing is for the counter-party to admit when you're right.
And both those things are useless if you still don't get paid.

Is the idea still worth looking at?

Hedger4Life's picture


Gold miners are up 45 odd percent since early January.


Look at RING or GDX Gold Miner etfs. Ring is more international GDX US skewed.


Similar story for SIL. Silver Miners

realmoney2015's picture

Zerohedge is Mainstream! 

This site is owned by ABC (Disney). This is just another controlled piece of propaganda media brought to is by corporations and fascists. 

Don't believe me? Look at the bottom of the page!

"Copyright ©2009-2016 Media, LTD; All Rights Reserved. "

Arnold's picture

Many have come to the gate .

None have left.



Insurrexion's picture



Fuck off Realmoney Idiot. This is an old hater tactic.

ZH is not MSM, ABC Disney, or the guy that shaved your moma's back last night.

Go back to your federal government job and watch kiddy porn.

realmoney2015's picture

Explain the legal comment at the bottom of the page! Why does the copywrite information list this site as an ABC media production?

Insurrexion's picture



First of all, fuck head, you did not read my first line. I repeat, Fuck off.

Second, LTD is a corporate abbreviation used in the fucking United Kingdom asshole.

Third, ABC, Inc. DBA Disney–ABC Television Group (a.k.a. Disney–ABC) manages all of The Walt Disney Co's Disney and ABC-branded television properties.They are headquartered in Burbank, CA, not the fucking U.K.

Fourth, I guess Tyler forgot to ask you if their ABC Media name was ok in your fucking Zika virus infected numb skull brain. I guess they didn't have a security clearance to get to your federal government office, or your .gov email.

Fifth, return to the first line.

nscholten's picture

Easy killer.  Its just a question.

ISEEIT's picture

Zerohedge is a provider of information/content. Zerohedge is what Zerohedge is.

I've pulled more comments than I've made.

Use Zerohedge wisely.

Escrava Isaura's picture



manofthenorth: I'm with you Do chen,


You’re misspelling the name of the N E W Hedger. Do chen left Zero Hedge scared to death, then killed himself because Tyler didn’t remove his posts.

I suggest you to get some new eyeglasses.

Surviver22's picture
Surviver22 (not verified) Escrava Isaura Feb 6, 2016 4:20 PM

This is Donald Trump's most shocking statement yet, However the mainstream media isn't saying a word about it!What are they really trying to cover up?

38BWD22's picture




Rumor has it that DoChen (uh, what?) actually had a personal issue to deal with, and scrambled his password to force himself off ZH.  

Apparently no deaths were involved at all (whew!).

swmnguy's picture

I remember that, and I'm delighted to have "38BWD22" as a fellow Hedger.  That said, ZH, like everything including Moderation, should be taken in moderation.

There's death and there's death.  I had a traumatic incident when I was 18 years old, that I really shouldn't have survived.  It did short-circuit a vicious spiral I was in.  As I was forced to take some time and contemplate in what state I found myself and why, I decided to pretend that I had, in fact, not survived.  Freed, at least in my pretense with myself, of some of the obligations and character flaws I had been slave to, I found it amazingly easy to walk away from a great many negative patterns, behaviors, and ways of thinking.

Nothing works perfectly or forever, but that experience changed my life for the  better in so many ways I can't imagine where I'd be today, or what might have happened in the intervening 31 years, had I not gone through that, unpleasant though it was.

So I think I get it, or at least I flatter myself so.

Dragon HAwk's picture

they tell people thinking of suicide , to just one second before they kill themselves to just walk away and keep walking till everything they are and own and think are behind them just keep walking till there is absolutely nothing that was you, is still there.

puckles's picture

What you all seem to forget is that with precious metals, there is always counterparty risk, because they are priced in currencies.  Also, our government has seen fit to slap a special tax on precious metal holdings that are not within the jewelry range.  So even if you realize some sort of profit, it will be taxed at a considerably higher rate than other investments, and this was extended to virtual, i.e., "paper" precious metals as well.  They have thought this out very well.

Your theory about there being no counterparty risk only works in a situation of close to total collapse, when there is no longer any confidence in government whatsoever, and hence, no confidence in any currency.  But by then, you will have to devise other means of exchange anyway.  After all, what are you going to do, carry a diamond edge razor blade to shave off a few microns of gold to pay for the few groceries that might exist?  Good luck with that.  You will be back to barter in a heartbeat.  It appears that nobody on this site has ever studied history.  Yes, there are many buried hoards of gold that have been discovered.  But they clearly didn't do their owners any good, did they?  They never reclaimed them.  And that scenario brings up an entirely different ball of wax, which I won't go into here.

F22's picture

Puckles, you are right, we will not carry around a diamond edge razor blade to shave off a few microns of gold to pay for groceries.  We will use dollars for that.  Currencies will continue to exist and, indeed, they will be an essential part of commerce after the end of the USD reserve status.  Massively revalued gold ($55K+ per oz.) will not be used as transactional currency.  It will be used as a store of value.  People will save in dollars, and use dollars for the short term.  They will save in gold for retirement.  The value of the USD will depend on the government's ability to spend within its means and balance trade.  The US will no longer be able to run a $40B/month trade deficit--doing so will massively devalue the dollar in a system where all currencies adjust continuously based on trade balances.  How many Indians do you think save in Rupees for their retirement?  Probably none, they save in gold.  The same question asked about Americans will seem equally obvious after the transition away from the USD reserve currency system.  Gold is a store of value that you use to preserve your wealth.  If you don't have wealth and your primary concern is buying food, you will not use gold.  If you are a saver and produce wealth beyond what you consume, you will seek the safety of gold.  If you buy physical gold now with money that you are saving...not money that you need to live on, you will benefit massively when it revalues.  If you do not have excess savings you will probably not be able to buy any gold.  I would rather have physical gold than stocks or bonds.  Stocks and bonds and paper gold (GLD gold stocks and derivitives) will burn in the coming fire.


38BWD22's picture



+ $55,000

Gold's highest and best use is as THE Store of Value.

manofthenorth's picture

Unmatched portable universal collateral ;-)

F22's picture

Central banks hoard gold, they do not hoard silver.  When the dollar debt ponzi crashes and we transition to the next system beyond the USD reserve currency $IMF system,

gold will massively revalue.  This is how the central banks will recapitalize their reserves.  Silver will not massively revalue.  It's better to save in physical gold.


bilbert's picture

Bah - the 77 - 1 Silver/Gold ratio is much too high, for many reasons.

Research: "Above ground Gold/Silver", and:

"Silver to Gold ratio in the Earths' crust"



manofthenorth's picture

Silver is money, gold is collateral.

Silver exists in the earth maybe 19 to 1 to gold.

It is extracted at about 9 to 1 to gold.

Revalue both accordingly.


Tegrat's picture

Agree. Silver will drop to $2.97 real, ie, current value and gold anywhere from $28k to $55k in real, ie current value. Also in terms of how much TP each will buy.


So TP would be better to hold across reset than silver. At least it will not lose it's value. In my estimation it will harder to come by so I would rather have it than silver. I lost a monster green box in a boating accident but that was long ago. I have been losing Au to that nessy monster ever since. 

Water, food, TP, lead THEN Au stacking. Explained in full detail here:

Of course, the highly articulate author of this blog follows imaginary internet characters so do your own DD.



Theosebes Goodfellow's picture

~"The article is too complicated for us simple folk."~

My thinking exactly. The "Smart Money" may be too smart for its own pants by half. Isn't what they are doing simply shuffling the deckchairs on the Titanic? If you are gambling with monopoly money, what happens when everyone finally agrees the shit's worthless?

Call me a simpleton, but I also will continue to accrue shiny and go boating. My only counterparty is the guy renting diving equipment. Stupid me.

gm_general's picture

Weren't the smartest financial eggheads in the room at LTCM when it blew up in their faces?

BandGap's picture

This old man has issues understanding, too.  So let me get this straight so I can prepare if I have to.

The market crashes (because then the shift moves elsewhere because that is where the bets are), ordinary people then move to bonds and money market accounts. THEN the Fed moves to sub zero interst rates?

Isn't it at this point that IRA, 401K and pensioners might think they are getting screwed?

Escrava Isaura's picture



38BWD22: The article is too complicated for us simple folk.


Complicated? WHAT!


You, simple folk? WHAT!


38BWD22's picture



Hardly any of us speak Portuguese and English.  Not me.  That makes me simple and you smart.


Arnold's picture

I lived in DC for a year and found it severely depressing.


Carefull you don't have some sort of Illegal gun confrontation to take away your pocket wealth coming out of Alfie's one night

wholy1's picture

"Simple" until SOME-body - regardless of how it is physically "held" - unknowingly absconds with it.  But, I'm sure you have the "all worked out".

holgerdanske's picture

"The 'SMART MONEY', had a tragic boating mishap this past summer & is now investing in snorkels & skin diving gear."

Dragon HAwk's picture

and handed in to police.?


TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) KesselRunin12Parsecs Feb 6, 2016 5:04 PM

I wonder who is the "Smart Money" when Hedge Funds were crucified in 2015.  "Smart" money is on the sidelines would be my guess, this is turning into a game that is best not to play at all.

stant's picture

Holding us dalla cash . And buying pm on every spike in the dalla. Until the dalla blows IMHO

KnuckleDragger-X's picture

That's likely the best thing to do since there's no good bets left. "Smart money"Really??? If it all goes down the toilet, they won't even have anything to wipe with, since its all just numbers on a computer, but then again, I've seen people bet on cockroach races and scorpian fights......

Flankspeed60's picture

Ha! Knew an old navy salt stationed on Guam back in the late fifties who watched bets on which seagull took a shit first.

yellensNIRPles's picture

I wonder how many billionaires are quietly buying physical...