My colleague Jan Vecer in the statistics department at Columbia gave a talk the other day on “Crash options.” His claim was that the introduction of such options could have a socially beneficial effect by allowing investors to plan more effectively in the context of market instabilities. I’m in no position to evaluate this one way or another, but it sounded like a cool idea, so I’m passing it along.

Here’s Jan’s abstract:

In this paper, we introduce new types of options which do not yet exist in the market, but they have
some very desirable properties. These proposed contracts can directly insure events such as a market
crash or a market rally. Although the currently traded options can to some extent address situations
of extreme market movements, there is no contract whose payo® would be directly linked to the market
crash and priced and hedged accordingly as an option.

Here’s the paper, and here are the slides from a talk he gave on the topic.

Unfortunately, his paper has no cool graphs. I’ve suggested to Jan that he make a graph to show how the crash option could work to stabilize the market. I know he has the ability to make cool graphs; see his paper on tiebreakers in tennis and here for an article about his tennis predictor.