Massive S&P options trade may have rattled US stocks on Thursday

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 30, 2022. REUTERS/Brendan McDermid

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NEW YORK, April 1 (Reuters) – Traders are pointing to a huge quarterly options trade on Thursday that they say originated from a JPMorgan fund (JPM.N) as one of the reasons the stock market slumped. fell at the end of the day, while the options are circulating. related to trade exacerbated market weakness.

The S&P 500 Index (.SPX) fell 1.2% in the last hour of trading Thursday, marking the index’s biggest hourly decline in more than three weeks. It ended the day down 1.56%, with some attributing some of the weakness to the large options trade that fell earlier in the day.

“I think the trade has exacerbated volatility,” said Brent Kochuba, founder of analytics service SpotGamma, noting that it was out of the ordinary since quarterly hedging activity typically doesn’t move markets much.

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The way the trade is structured means that when the market begins to fall, options brokers – usually large financial institutions that facilitate trade but seek to remain market neutral – would have been forced to sell an increasing number of contracts at equity futures, making the selloff worse, SpotGamma said. said Kochuba.

Markets had a rocky quarter due to Russia’s invasion of Ukraine, volatile commodity prices and the start of interest rate hikes by the US Federal Reserve. It is unclear what caused the initial market weakness late Thursday afternoon that triggered the cascade of equity futures selling. Read more

The trade, which took place shortly before 11:00 a.m., was a large collared options trade, involving the sale of approximately 44,000 June calls and the purchase of an identical number of June sell spreads, which would pay if the S&P 500 were to fall more than 5% from its current level. A collar is an options hedging strategy involving a combination of put and call options.

The trade also involved selling around 24,800 related calls at the 4,300 level on the S&P 500, which was set to expire at the end of Thursday’s session, to hedge against any sharp market moves during the trading session. .

Traders pointed to the $19 billion JPMorgan Hedged Equity Fund as driving the moves. The fund, which holds a basket of S&P 500 stocks as well as options on the benchmark and resets hedges once a quarter. Because the fund is so large, traders know and anticipate its patterns.

Kochuba said that based on past trading patterns and details of investment strategies set out in the fund’s prospectus, the transaction was initiated by the JPMorgan Hedged Equity Fund.

Joe Tigay, portfolio manager at Equity Armor Investments, also said the trades were hallmarked by the JPMorgan fund’s hedging program.

Asked about the transactions, Kristen Chambers, a spokeswoman for JP Morgan Asset Management, confirmed that the fund had a planned quarterly hedging program but did not confirm exact details of the transaction.

Systematic traders, often hedge funds, take a rules-based approach to their investments and are often guided by fixed quarterly timeframes rather than strong investment themes.

As such, other investors are not trying to glean signals from their choices of option strike prices and expiration dates, as they would with a trade made by a discretionary investor.

“This is a systematic trade that we see at the end of each quarter,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

Thursday’s trade, worth around $20 billion in notional terms – based on the index level – replaces a similar position opened at the end of last quarter, according to data from Trade Alert.

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Reporting by Saqib Iqbal Ahmed; edited by Megan Davies and Sam Holmes

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