Nervous stock traders brace for $2 trillion option expiration

(Bloomberg) — Inflation is soaring, central banks are moving and now is earnings season. To top it off, stock traders face the potential for market turmoil from a monthly options expiration estimated at over $2 trillion.

About $495 billion in equity derivatives are set to expire on Thursday, with an additional $980 billion in S&P 500-linked contracts and $170 billion in State Street fund-linked options trailing the S&P 500 all exhausted by the end of the month. shortened weekends. as estimated by Rocky Fishman of Goldman Sachs Group Inc. These volumes have been a source of volatility over the past year.

Although nothing is ever assured in the markets, the indices have shown a constant downward trend on the days when the contracts are closed. This time around, it comes as equities suffer from another bout of volatility, with the S&P 500 registering just four positive days since the start of the month.

It’s not unusual to get a monthly expiration on a Thursday in April, but other ‘wrinkles’ occur as it may coincide with tax day and the start of income season, which we both get now “Steve said. Sosnick, chief strategist at Interactive Brokers LLC. The deadline for Americans to file their taxes is April 18.

With monetary and fiscal support receding, investors retreated – and the mood turned gloomy. A survey by Bank of America Corp. showed that fund manager optimism about global growth is at an all-time high. The highest number since 2008 predicts a period of stagflation of weaker growth and still high inflation. The sentiment is “bad,” the bank’s strategist said. Managers remain in the “sell the rally” camp and consider the sale that started as a simple “appetizer”.

Others return to their optimism. Marko Kolanovic of JPMorgan Chase & Co., once a steadfast bull, said investors who previously increased their equity holdings should now take profits and shift some of the money into government bonds. Keith Lerner of Truist Advisory Services downgraded his view on equities from neutral to attractive, while saying the range of potential economic and market outcomes was “exceptionally wide”.

A cautious stance also prevails in single-stock data. The 20-day average of Cboe’s put-call volume ratio for individual stocks rose from a four-month low, showing increased moves to hedge against price declines. Meanwhile, the Cboe Volatility Index, a gauge of S&P 500 option prices, has been swinging wildly this month, dropping from 18.6 to 24.37. It was in the middle of that range at 3:50 p.m. Wednesday.

“Given the political uncertainty and supply chain issues, I think this is not an easy time, especially for equity markets,” said Katy Kaminski, chief research strategist at AlphaSimplex. , in a telephone interview. Inflation, for example, “has more wiggle room than most people would like to think. They keep thinking everything is going to be back to normal and I think it might take a while.

The volume of mushroom options is a regular feature of post-pandemic markets. Bullish options contracts have become a favorite tool for retail traders who have weathered the Covid lockdowns trading from their phones. Today, in more choppy markets, the demand for bearish options has increased. Contracts linked to declines in State Street’s S&P 500 ETF and iShares iBoxx High Yield Corporate Bond ETF began to rise again, with open interest on the high-yield fund rising.

Granted, Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said that this time around there’s likely to be less impact on single stocks than during the day-trading frenzy of the two. last years. Investors who bought put options in January and February when the market was selling are now short of money, he says, which could lessen the impact of expirations on market movements.

His team says a total of 85 million options contracts listed in the United States are due to expire on Thursday, down 8% from a year ago. Single stock contracts are down 12% year over year. “We’re seeing a lot less stock trading compared to last year, that’s the main culprit,” Murphy said.

Meanwhile, index and ETF contracts rose 7% and 3%, respectively, from year-ago levels. “This is likely due to an increased focus on the macro environment and greater coverage,” he said.

©2022 Bloomberg LP

Comments are closed.