June 27, 2022

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Massive S&P options trade may have roiled U.S. stocks on Thursday

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NEW YORK — Traders are pointing to a massive quarterly options trade on Thursday they said was from a JPMorgan fund as one reason why the stock market took a nosedive late in the day, as options flows linked to the trade exacerbated market weakness.

The S&P 500 Index fell 1.2% in the last hour of trading on Thursday, marking the largest hourly drop for the index in more than three weeks. It finished the day down 1.56%, with some attributing part of the weakness to the large options trade that went down earlier in the day.

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“I think that trade exacerbated volatility,” said Brent Kochuba, founder of analytic service SpotGamma, noting that this was out of the ordinary since the quarterly hedging activity typically does not move markets much.

The way the trade is structured means when the market starts to fall, options dealers – typically big financial institutions who facilitate trading but seek to remain market neutral – would have been forced to sell an increasing number of stock futures, thereby aggravating the selloff, SpotGamma’s Kochuba said.

Markets have had a rollercoaster quarter due to Russia’s invasion of Ukraine, volatile commodities prices and the U.S. Federal Reserve starting to hike interest rates. It was unclear what caused the initial late-afternoon market weakness on Thursday that triggered the cascade of stock futures selling.

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The trade, which took place shortly before 11:00 am, was a large collar options trade, involving the sale of about 44,000 June calls and the purchase of an identical number of June put spreads, that would pay up if the S&P 500…


2022-04-01 00:05:31

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