The $300 Billion Structured Notes Market Is Booming

Nov 2, 2026 · Summarized Nov 2, 2026

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Key takeaways

A structured note combines a bank obligation with customized options, allowing investors to exchange ordinary interest or some upside for a coupon, participation, or conditional downside protection.
Auto-callables can offer higher yields because they terminate when the underlying rises, leaving investors with reinvestment risk if the next available note pays less.
Worst-of structures referencing several indexes or stocks increase coupons by exposing investors to the weakest performer, while creating additional correlation and hedging risk for dealers.
U.S. SEC-registered structured-note issuance was described as tracking toward $300 billion, up from roughly $200 billion the prior year, with S&P-linked and worst-of index products driving activity.
Rising markets can cause notes to knock out quickly, but a decline extends their maturities and increases dealers’ vega exposure precisely when liquidity and willingness to buy options may be falling.
Investors generally prefer a volatile entry followed by a quiet, slightly lower or sideways market: they collect a high coupon without triggering the downside barrier or an early knockout.

Summary

Why Odd Lots turns to structured notes now

Tracy Alloway and Joe Weisenthal introduce structured notes as a previously scattered topic that deserves a full episode because market prices are driven by technical flows as well as fundamental views. AI-related assets have risen sharply, with revenue and capital-expenditure expectations still pointing upward, but turbulence is appearing in areas including neoclouds and credit-default swaps—even NVIDIA CDS had begun to rise. Investors expressing AI bets through notes can seek returns far above ordinary equity gains, while nervous investors can buy downside protection. Their guest is Alex Micalizzi, Nomura’s international head of equity structured notes.

Micalizzi defines a structured note as an IOU with options

Micalizzi describes a structured note as something between a bank deposit or bank IOU and a derivative: an investor gives the issuer money, forgoes ordinary interest, takes the bank’s credit risk, and receives a customized equity payoff. The bank can provide upside participation through a call, call spread, or digital; bearish exposure through a put or put spread; or, most commonly, enhanced yield by selling a put and passing its premium to the investor as a coupon. Auto-call features and other bells and whistles can combine yield and participation.

High-net-worth investors buy customization ordinary markets cannot provide

The natural buyers, Micalizzi says, are predominantly high-net-worth individuals using private banks. They understand a coupon and may want some downside protection or enhanced income, but cannot efficiently reproduce structures involving worst-of baskets, correlations, auto-call features, and exotic put spreads in listed markets. Alloway compares banks to a kitchen buying wholesale fruit and chopping it into the customer’s desired instrument; Micalizzi agrees that the bank combines raw options into a customized payoff. The extra yield compensates investors for accepting risks they might otherwise hold through a stock, index, or Treasury position.

Auto-callables pay more because the investment can end early

An auto-callable can terminate before its stated maturity if the underlying is above its initial level on a scheduled observation date. In Micalizzi’s example, a three-year S&P 500 note observed every three months disappears after six months if the index is higher, returning the investor’s money and the final coupon rather than continuing for three years. The yield is higher than a plain three-year put because the bank may no longer need protection after a rally, while the investor accepts reinvestment risk: a replacement note may offer a lower coupon if volatility has fallen.

Buffers and knock-ins determine how much downside investors sell

Micalizzi explains a typical note beginning with an index level of 100 and a 60% strike. If the S&P falls 20%, the investor remains protected, but below 60 the investor can receive the same downside as owning the index from 100, depending on the exact knock-in structure. A vanilla put would limit the relevant loss to the strike distance, while a knock-in can expose the investor to the full decline from 100 to zero, producing more premium and therefore a higher coupon. The investor gives up some upside and assumes nonlinear downside risk.

Worst-of baskets boost coupons while adding correlation risk

A common U.S. structure references the S&P 500, Nasdaq, and Russell indexes and uses whichever performs worst. Two indexes could rise 20% while the laggard remains flat or falls, and the laggard determines the investor’s payoff. Because the bank is effectively selling more valuable downside than on one index, the coupon is higher, but the issuer must model how all three assets move together. A favorable outcome for the buyer is a turbulent launch that creates a high coupon, followed by a quiet market in which two indexes rally and the weakest one merely moves sideways.

Issuance has grown to roughly $300 billion, led by U.S. index notes

Micalizzi says U.S. SEC-registered structured-note issuance is on track for about $300 billion in the current year, versus approximately $200 billion the previous year. The S&P 500 is the largest contributor, while worst-of auto-callables referencing the S&P, Nasdaq, and Russell have shown the greatest growth. The Russell’s long period of sideways trading followed by a strong rise helped those notes knock out. A five-year note that terminates every few months can generate much more repeated issuance and hedging activity than its headline maturity suggests.

Dealers hedge delta first, then manage volatility, digitals, and correlation

When Nomura issues a note, Micalizzi says it first removes delta—the product’s sensitivity to the underlying price—so the bank is not taking a directional view. It then manages vega, the sensitivity to implied volatility, and the digital or call-spread components created by scheduled knockouts. Dealers may hedge a modeled six-month expected life by selling listed downside through S&P market makers, even though the actual product has forward-starting and contingent risks. Worst-of notes add correlation exposure, while assumptions about stochastic volatility and volatility-of-volatility are difficult to observe, especially for single stocks and daily knockouts.

A falling market can leave dealers short vega and short gamma

At the start of the year, rising markets caused many notes to knock out, leaving dealers with less vega to hedge and creating a relatively smooth cycle of maturing trades and new issuance. When indexes or stocks fall, notes survive longer, so their volatility exposure expands just as market makers become less willing to absorb it. Dealers may then have to sell more optionality into weakness. Near a barrier, a binary payoff can make dealers short gamma, forcing them to sell as markets fall and buy as they rise, potentially amplifying moves. A slow grind lower can be more painful than a sharp fall because hedges, maturities, skew, and term structure all shift.

Single-stock AI notes and increasingly exotic designs

The popular single-stock underlyings are semiconductor companies and hyperscalers; Micalizzi says there is also a CoreWeave product in Asia, including one discussed publicly with an annualized yield near 40%. Single-stock notes often observe knockouts daily and can run from six months to 18 months or two years, creating an all-or-nothing volatility exposure. He describes an especially creative structure in which one stock that rallies 20% can be removed from the basket, leaving a deeply fallen stock whose valuable put can suddenly disappear if the remaining name rallies. Micalizzi says greater client sophistication permits more exotic designs, but size and liquidity ultimately constrain them.

Show notes

The structured products business in the US has gotten very large recently — on track to hit $300 billion in sales this year. That they are all the rage means a once opaque financial product is getting a lot more attention. So what are structured products, exactly, and how are they influencing the economy? In short, structured products are basically a fusion of a bank IOU with a derivative product, but that underplays how complex these things are and how they are shaping market dynamics. What is particularly interesting about structured notes is how they've become a stand-in for how investors are betting on the AI trade — the ways these products are structured allow market actors to really capitalize on some of the turbulence we're seeing. On this episode, we speak with Alex Micalizzi, who is the international head of equity structured notes at Nomura, and he gives us what might be the clearest explanation of how structured products are created, how they work, and why sales in structured products have grown so much in the last year.

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