Traders watching price action in stocks might have noticed that the S&P 500 has slid toward the 3,900 level three different times Thursday, before holding its ground. The resilience can be attributed to Friday’s $3.2 trillion option expiration, one theory holds.
As of midday, roughly 13,000 puts expiring Friday linked to the equity index with a 3,900 strike price have changed hands, with the cost, or implied volatility, falling almost 2 points over a span of two hours, according to Cantor Fitzgerald LP.
The drop in prices suggested that those contracts were either sold for a profit or rolled out to long term options, says Matthew Tym, the firm’s head of equity derivatives trading. Such moves prompted options dealers who were on the other side of the transaction to buy shares to maintain a neutral market exposure, likely acting as a buffer.
“You would take this option that suddenly has value again and roll it down and out to give yourself more time, if you have a desire to keep a certain level of protection,” Tym said. “If someone is buying that put from you, they’d need to buy stocks to be delta neutral.”
The S&P 500 fell as much as 1.1% to 3,902.62 before trimming the loss to 0.1% to 3,942 as of 1:23 p.m. in New York.
The dynamic is the latest example of a narrative that says stocks are occasionally held hostage by the bets derivatives traders make on them. Friday’s event, also known as OpEx, was blamed for exacerbating the equity rout earlier this week, when a hotter-than-expected inflation reading triggered a 4.3% drop in the S&P 500.
The 3,900 level has become a battle line for bulls and bears in recent months, acting as a support in mid-May and then keeping a lid on advances briefly in June and July. After managing to close above the threshold during a retreat on Sept. 6, the S&P 500 embarked on a four-day rally.
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