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: