"Autocallables" - impact on the market

I’m always intrigued when I see a term that’s new to me. What’s an “autocallable”?


Markets Are Lulling Themselves Into a False Sense of Security

Stocks’ low volatility may be a misleading result of a boom in autocallables and other structured products

By Jon Sindreu, The Wall Street Journal, March 7, 2024

If you bought so-called structured products recently, you have plenty of company. But it is precisely their popularity that could make them—and perhaps the entire stock market—riskier than they seem…

The most widespread type are “autocallables,” which are particularly big in Asia. Sold by banks, the notes are linked to the price performance of an underlying asset, for example, the S&P 500. If the index is within a certain range on given dates, buyers receive generous coupons. If it goes above a threshold, the note gets repaid. Often, they offer some downside protection too. Investors lose stock-market upside in exchange for income and a bit of extra safety…sometimes yielding as much as 10%…

Equity-linked autocallables are essentially bets against volatility: Buyers want stocks to go up but not too much, and they certainly don’t want them to go down…

Structured products might themselves be what is lowering volatility. …To hedge the risk, trading desks have been leaning against swings in stocks, selling them when they go up and buying large drops — a practice known as delta hedging. This has pulled down long-term volatility, making it cheaper to insure against it… [end quote]

The speculation on low volatility will work until there’s a crisis and VIX spikes. It doesn’t necessarily have to be a massive financial crisis. VIX spikes regularly for all kinds of reasons. Anyone who invests in this kind of product should consider that events in the real world can massively impact volatility, overwhelming the efforts of banks to tamp it down.