Huge S&P Options Trade May Roiled US Shares

Traders point to the massive quarterly trading of options on Thursday. They said it was from the JPMorgan Foundation, one of the reasons the stock market fell at the end of the day. Trading options flows exacerbated market weakness. The S&P 500 index dropped 1.2% on Thursday. This is the most significant hourly drop in the index in more than three weeks. It finished the day with 1.56%. Some attributed part of the weakness to trading in extensive options, which fell early in the day.

Analysts estimate that trade intensified volatility. However, this was not normal. As a rule, quarterly hedging activity does not move much in the markets. The trade structure means that when the market starts to decline, options dealers would force to sell many stock futures. It would even make the sale worse.

Markets decreased due to the Russian invasion of Ukraine, volatile commodity prices, and rising interest rates in the US Federal Reserve. It was unclear what caused the initial weakness in the late-afternoon market on Thursday, leading to a cascade of stock futures sales.

The trade, which took place until 11:00 a.m., was a large collar options trade that included about 44,000 June call sales. Also, buy an identical quantity of June spreads that would have paid off if it had been the S&P 500. It will be reduced by more than 5% from the current level. Collar options are a hedging strategy that involves a combination of pots and bells.

US Shares and Trade

The trade also included the sale of approximately 24,800 calls related to 4,300 levels on the S&P 500. This expires at the end of the Thursday session as a hedge against any sharp movements in the market during the trading session.

Traders pointed to $ 19 billion in JPMorgan hedged equity. The fund owns a basket of S&P 500 stocks with options on the benchmark index. It also restores hedges once a quarter. Because the fund is so large, traders know and expect its patterns. Based on details of past trading patterns and investment strategies outlined in the fund prospectus, The deal was initiated by the JPMorgan Hedged Equity Fund.

According to Equity Armor Investments Portfolio Manager, trading has a hallmark of the JPMorgan Foundation hedging program. When asked about business, a spokesman for JP Morgan Asset Management confirmed that the fund has a planned quarterly hedging program; However, they did not confirm the exact details of the trade.

Systematic traders, often hedge funds, take a rule-based approach to their investments. They are also often driven by fixed quarterly schedules rather than vital investment topics. Other investors do not attempt to receive signals from the options pricing and expiration date, As was done by the discretionary investor in trading.

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