How do Households Suppress the Price of Tail Risk?

We examine how households dampen volatility prices through their demand for Short Put Products (SPPs) -- a globally popular structured product that offers high headline rates in exchange for selling a deeply out-of-the money put option. Using a comprehensive dataset covering all index-linked SPP issuances worldwide since market inception, we empirically show that higher SPP volumes are associated with lower volatility prices. A natural experiment, based on a ban on a specific index-linked SPP, reinforces the case for a causal interpretation. To uncover the underlying mechanism and quantify the equilibrium effects, we develop a structural model in which households underweight left-tail risk, driving demand for SPPs. Risk-averse financial intermediaries optimize the headline rate offered, match exogenous demand for put options, and hedge imperfectly by trading the underlying equity index. In this framework, SPP volume enters the dealer's stochastic discount factor and thereby affects the price of every put. As a result, when volatility rises, stronger demand for SPPs -- driven by higher headline rates -- exerts increasing downward pressure on option prices, particularly at low strikes. Our findings reveal how household appetite for exotic security designs, shaped by non-standard preferences or beliefs, can significantly reduce the cost of insuring against left-tail risk for other market participants.