Battered stock traders brace for $1.9 trillion option expiration

(Bloomberg) — Stock traders still clinging after U.S. benchmarks fell sharply this week better tighten their grip — OpEx is back to stoke more unrest.

The monthly expiration of options related to stocks and exchange-traded funds is known to stir up volatility, and the next event will take place on Friday. Traders will close old positions for around $1.9 trillion in derivatives while rolling out new exposure, all with the S&P 500 on the verge of a bear market.

This time around, $460 billion in derivatives on individual stocks are set to expire and $855 billion in S&P 500-linked contracts will run out, according to Goldman Sachs Group Inc. strategist Rocky Fishman.

With daily options volume heading towards a yearly high, expiration is a widely watched event on Wall Street, as movements in the derivatives market have the ability to spur swings in the underlying securities. All of this is another layer of business complexity for investors battered by the pace of disappointing corporate earnings and the ferocity of the Federal Reserve.

“Sentiment is weak,” said Danny Kirsch, head of options at Piper Sandler & Co. “Now, with daily options, the open interest landscape is super dynamic, at least as far as the S&P 500 is concerned. “

Falling for a seventh consecutive week, the S&P 500 is on track for its longest decline in 21 years. Stock losses deepened this week as profits from retail giants such as Target Corp. and Walmart Inc. have heightened concerns that inflation is eating away at US corporate bottom lines. The S&P 500 fell 0.6% to 3,900.72 on Thursday.

Selling stocks gets no sympathy from central bankers. After almost always coming to the rescue at the first sign of market turmoil over the past decade, the Fed is now focusing on tightening monetary policy to fight inflation, a shift that has underpinned that rout.

Fears that rate hikes could push the economy into a recession prompted traders to seek protection in the options market. Cboe’s 10-day average put-to-call volume ratio for individual stocks hit its highest level since the pandemic crash of 2020, a sign of heightened caution.

But lately, there are indications that investors are also picking up bullish options on ETF tracking indices like the S&P 500 and Nasdaq 100, a move that some analysts say reflects fear of missing out if the market rebounds after one of the worst routs in decades. .

All of this means that 2022 is shaping up to be the busiest year for options trading. Nearly 40 million contracts changed hands daily on average, 6% more than last year’s record high, according to data compiled by Bloomberg.

On Friday, expiring options on the S&P 500 showed the highest concentration in the 4,000 strike, with more than 93,000 open positions on the verge of exhaustion. This includes 41,024 calls and 52,269 puts.

If the S&P 500 closed well below 4,000 on Friday, that could pave the way for a rebound on Monday as dealers who traded those options and ran out of shares to neutralize their positions should unwind that hedge, according to Brent Kochuba. , founder of the SpotGamma analysis service. . In other words, market makers will be free to buy back shares to cover short exposures that are no longer needed.

Still, any impulsive recovery is unlikely to last, Kochuba says.

“The Fed will continue to raise rates,” he wrote in an email. “Any ultimate non-Opex rally, we would consider it a short hedge and subject to quick reversals through the end of next week.”

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