Analysis: Options trades, lockstep moves fuel U.S. stock swings

NEW YORK, Oct 24 (Reuters) – A surge in short-term option bets, rock-bottom equity allocations and similar moves in individual stocks are fueling volatility in equity markets. of America which has surprised bulls and bears alike in recent weeks.

A one-month daily for the S&P 500 (.SPX), which measures the index’s biggest move over the past month, climbed to its highest level since early July. The index has recorded 40 movements of more than 2% in both directions this year, a number that exceeded the peak of the disease sold in 2020 and, before that, the depth of the financial crisis of 2008-2009.

The news came on Friday, as renewed hopes that the Federal Reserve will slow its monetary policy spurred a rally. it’s noon. The S&P 500 gained more than 2% for the day, after falling as much as 0.5% earlier in the session.

Subscribe now for unlimited access to

“We’re seeing a lot of activity not just on the bottom line… but on the upside, as investors seem to be chasing profits at the end of the year,” the report said. said Anand Omprakash, head of quantitative analysis at Elevation Securities.

Also Read :  Dutch court sentences three to life in prison for 2014 downing of MH17 over Ukraine
Reuters Graphics Reuters Graphics

Among the things that drive change is a flood of options trading, many of which are short-term. One-month average daily trading in the US listed options market stands at 43 million contracts, just shy of a record, and about 20% higher than last year, according to Trade Alert information.

The rise of options trading increases the reliance on market makers – usually large banks or financial institutions that facilitate trading. and they need to be organized in the same future to reduce their risk from sudden events in the markets.

Their frenzy of buying and selling can increase short-term changes in stocks, adding to the widening of the horizon, market participants said.

“Buying stocks in the stock market has become very important in influencing the markets in the short term,” said Garrett DeSimone, head of comparative research at OptionMetrics.

“I hope that these protection flows are likely to be used the most in times of low water, and follow the important news,” he said.

Reuters Graphics

The increase in the trading of options contracts that expire below the date further exacerbates the changes, as their closeness to the expiration date is very sensitive. That’s due to market volatility and calls for increased hedges, market participants said.

Also Read :  Spanish inflation slows more than expected to 5.8%

Trading in S&P 500 options with one day or less to expire has grown to 50%-60% of volume, from 10%-30% earlier this year, according to Brent Kochuba, founded the analytics service SpotGamma.

“I think this triggers ‘jump risk’ in the markets … hidden pockets of volatility that are very difficult to predict,” said Kochuba.


Meanwhile, many so-called “real money” investments like pensions and mutual funds have cut their shares to the bone after months of similar bullishness, another aspects that create product changes.

“The recent change is … a result of the ‘real money’ sitting on their hands and not being there to buy into the weakness, or sell to the media,” said a Michael Lewis, head of US equities cash trading at Barclays.

Deutsche Bank’s ( DBKGn.DE ) composite index has fallen just 6% of the time since January 2010. Data from Goldman Sachs (GS. N) private equity showed leverage on hedge funds at its lowest level since March. 2020 during the week of October 7.

At the same time, the investors below the technical standards have recently jumped on sales announcements, further expanding the activity, said market participants.

Also Read :  Expect more choppiness ahead after a week of mixed market signals

“Some investors are looking to pursue short-term market trends even if it is more sustainable in the long term than the firm belief remains,” said Maxwell Grinacoff, equity derivative strategist at BNP Paribas. .


Picking up the correlations between each stock has added to the randomness of the activity. The Cboe 3-Month Implied Correlation Index (.COR3M), which measures the 3-month expected average correlation across the top 50 S&P 500 stocks, stood at 53.53, near a 2-year high high, and 18 points above its 5. -year average.

Investors’ expectations for each stock to move together have risen in recent weeks

When stocks are all moving on the same terms there is less chance of one stock group diverting the transfer to another. Instead, high correlation can drive the market in one direction or the other with high speed.

“It’s become a dangerous market where individuals don’t hurt themselves as much as the economic core,” said Elevation’s Omprakash.

Subscribe now for unlimited access to

Reporting by Saqib Iqbal Ahmed and Carolina Mandl; Edited by Ira Iosebashvili and Bill Berkrot

Our Principles: The Thomson Reuters Trust Principles.


Leave a Reply

Your email address will not be published.

Related Articles

Back to top button