Traders are blaming a big quarterly options deal on Thursday from a JPMorgan (JPM.N) fund for the stock market’s late-day decline, claiming that options flow connected to the trade worsened market weakness.
The S& P 500 Index (.SPX) dropped 1.2 percent in the final hour of trading on Thursday, marking the index’s biggest hourly drop in over three weeks. It concluded the day down 1.56 percent, with some blaming a major options trade that went wrong earlier in the day for some of the loss.
“I believe that trade increased volatility,” said Brent Kochuba, founder of analytic firm SpotGamma, noting that this was unusual because quarterly hedging activity usually does not influence markets significantly.
Because of the way the trade is set up, options dealers – typically large financial institutions that facilitate trading while remaining market-neutral – would have been forced to sell an increasing number of stock futures as the market fell, aggravating the selloff, according to SpotGamma’s Kochuba.
Due to Russia’s invasion of Ukraine, unpredictable commodity prices, and the start of interest rate hikes by the US Federal Reserve, markets have experienced a rollercoaster quarter. The cause of the initial late-afternoon market dip on Thursday that triggered the stock futures selling avalanche was unknown.
The move, which took place shortly before 11:00 a.m., involved the sale of approximately 44,000 June calls and the purchase of an equal number of June put spreads, which would pay off if the S& P 500 fell more than 5% from its current level. A collar is a type of options hedging strategy that combines puts and calls.
The trade also included the sale of around 24,800 calls tied to the S& P 500’s 4,300 level, which was due to expire at the end of Thursday’s trading session as a strategy to protect against any severe market moves during the trading day.
The $19 billion JPMorgan Hedged Equity Fund was blamed by traders for the changes. The fund, which includes a basket of S& P 500 stocks as well as index options, resets hedges every quarter. Because the fund is so vast, traders are familiar with its trends and can predict them.
The move was initiated by the JPMorgan Hedged Equity Fund, according to Kochuba, based on prior trading trends and details of investing methods given out in the fund’s prospectus.
