(Bloomberg) – Stock traders are holding on after a sharp fall in the U.S. benchmark this week – OpEx is back for more turmoil.
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The monthly expiration of options tied to equity and exchange-traded funds is notorious for triggering volatility, and the next event takes place on Friday. Traders will close old positions for an estimated $ 1.9 trillion derivatives when new exposures roll out, all on the brink of a beer market, including the S&P 500.
According to Rocky Fishman, a strategist at Goldman Sachs Group Inc., at this point, $ 460 billion of derivatives across the single stock are about to expire and S 855 billion of S&P 500-linked contracts will expire.
With the Daily Options Volume heading for an annual record, expiration is a widely viewed event on Wall Street because derivatives market moves are able to increase volatility in the underlying securities. All of this is another level of trading complexity for investors, with disappointing corporate earnings and the Federal Reserve volatile drumming.
“The feeling is bad,” said Danny Kirsch, Piper Sandler & Co.’s alternate head.
Down for the seventh week in a row, the S&P 500 is on its way to the longest fall in 21 years. Earnings from retail giants such as Target Corporation and Walmart Inc. stock losses have deepened further this week. The S&P 500 fell 0.6% to 3,900.72 on Thursday.
Equity sellers are not getting any sympathy from central bankers. After coming to the rescue almost always in the first signs of market problems over the past decade, the Fed is now focusing on tightening monetary policy to tackle inflation, a change that has underpinned this path.
Fears that a rate hike could push the economy into recession have prompted traders to seek protection in alternative markets. The 10-day average of Cboe’s put-call volume ratio for single stocks has risen to the highest level since the 2020 epidemic crash, a sign of high caution.
But lately, there are indications that investors are also finding bullish options in ETF tracking indexes such as the S&P 500 and Nasdaq 100, a move that some analysts say could be lost if the market bounces again after one of the worst paths in decades. Reflects fear. .
This means that 2022 is going to be the busiest year for alternative trading. Data compiled by Bloomberg Show, 6% more than last year’s record, saw an average of about 40 million contracts change hands every day.
On Friday, the expired S&P 500 options showed the highest concentration in 4,000 strikes, with more than 93,000 open positions closed. This includes 41,024 calls and 52,269 putts.
If the S&P 500 closes well below 4,000 on Friday, it could create a bounce platform on Monday as those who brokered these options and had little stock to neutralize their position will have to open that hedge, according to Brent Kachuba, founder of analytics services SpotGama. In other words, market makers will be free to buy stocks to cover short exposures that are no longer needed.
Still no knee-jerk recovery is likely to last, Kochuba said.
“The Fed will still raise rates,” he wrote in an email. “We will consider any final meeting of OPEC as short covering and there could be a quick reversal towards the end of next week.”
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