2023-09-28 18:19:30
A $16 billion JP Morgan fund, which is expected to reset its options positions on Friday, is attracting traders’ attention as a potential source of additional volatility at the end of the worst month of the year for U.S. stocks.
The JPMorgan Hedged Equity Fund, with assets of approximately $16.05 billion, holds a basket of S&P 500 stocks as well as options on the benchmark index and resets hedges once a quarter.
Among the stocks it holds are some of the biggest names in the market, such as Apple Inc, Microsoft Corp and Amazon.com Inc.
Due to the size of the fund, the options reset may cause a massive increase in S&P 500 options trading volume and trigger related hedging activity that might worsen market movements.
The position adjustment comes at a delicate time for U.S. stocks as rising U.S. Treasury yields hit stocks, sending the S&P 500 down 5.2% in September, pointing to the worst month for the index since December.
The recent market decline has brought the benchmark stock index to a level close to where some of the options in the trade might be triggered.
“There are times when the impact is less, but I think it’s bigger this time,” said Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
How fund rebalancing might end up affecting the overall market has to do with market makers – typically large financial institutions that facilitate trading but seek to remain neutral to the market.
Right now, with the S&P 500 trading around 4,290, market makers are short regarding 40,000 September 29 S&P 500 options at the strike price of 4,210.
Market makers who have sold these put options must sell stock futures to minimize their own risk as the market moves closer to the strike price of the options sold.
“When the market goes down, market makers have to sell and when the market goes up, market makers have to buy back,” Murphy said.
“So this exacerbates the movement,” he added.
The influence of the transaction on the market might even go beyond that, according to Mr. Murphy.
Traders, aware of the impending position adjustment and the potential for a resulting market drawdown, may not turn to buying stocks until the trade is complete, said Murphy.
One glimmer of hope is that as Friday’s deadline draws closer and the market remains well above the 4,210 level, market makers have less incentive to buy and sell actively trading stock futures.
If the market holds around the 4,300 level through Friday, options position shouldn’t have much influence on the market, said Brent Kochuba, founder of options analysis service SpotGamma.
“We need to get below 4,250 for the position to have any real influence on the market on Friday,” he said. (Reporting by Saqib Iqbal Ahmed; Writing by Megan Davies and Nick Zieminski)
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