The fresh boom in stock options that expire within 24 hours has grabbed all the attention on Wall Street trading desks — spurring a Goldman Sachs Group Inc. warning that the activity is fueling the recent market selloff.
Now, the grown-up versions of the derivatives are back in the spotlight in the monthly event known as OpEx.
Some $2.2 trillion of longer-dated contracts tied to stocks and indexes are scheduled to mature on Friday, according to an estimate by Rocky Fishman, founder of derivatives analytical firm Asym 500.
Investors must decide whether to roll over their options or to start new positions — a process that leads to a big spike in trading and potentially sudden price swings. This time around, OpEx comes at a critical juncture as the S&P 500’s big rally this year starts to fray amid bets that the resilient US economy will force the Federal Reserve to ramp up interest rates even higher.
While the options event usually provides a window of liquidity for anyone hoping to shuffle large positions, it adds another wrinkle of complexity for a capricious equity market — prone to intraday selloffs and frequent reversals.
Adding to the challenges for traders: The record popularity of options with zero days to expiration, or 0DTE, and the recent shift in positioning among market makers.
Predicting the outcome from OpEx is a fool’s errand. But recent history shows stocks rose more often than not after the event. During the ensuing week, the S&P 500 has climbed in all but six instances since the start of last year, or 68% of the time, data compiled by Bloomberg shows.
Heeding that pattern can be dangerous ahead of Kansas City Fed’s annual policy forum in Jackson Hole, according to Brent Kochuba, founder of analytic service SpotGamma. He’s advising investors to consider buying protection given how subdued the cost of options is right now.
“The OpEx frees up some directional movement, which is catalyzed by next week’s Jackson Hole,” he said. “It’s a reasonable time to pick up some longer-dated put hedges as implied volatility has not (yet) reacted to SPX downside.”
The S&P 500 slipped for a third session as global bond yields spiked. Down almost 5% in August, the index is poised for the worst monthly performance in 2023.
One breed of market player worth watching: Funds that buy or sell options as part of their investment strategy and rebalance their holdings monthly, like the Global X Nasdaq 100 Covered Call ETF (QYLD). As they roll out positions around the third Friday of a month, that activity can add a layer of uncertainty for traders.
For investors who use derivatives more discretely, the decision on how to position themselves may not come through easily this time. With this year’s darlings of technology stocks dropping to the bottom of the August leaderboard and the S&P 500 falling for a third straight week, the pressure to hedge against losses is building. In fact, trading action in zero-day options recently leaned toward bearish puts.
Yet as earnings estimates started to increase amid stronger-than-expected economic data, a case can be made that the current pullback is likely fleeting. That’s a view held by JPMorgan Chase & Co.’s trading desk, which expects equities to reach all-time highs after a recent bout of turbulence that’s potentially been driven by seasonal weakness and uncertainty over Fed policy.
Also at issue are market makers, who are on the other side of options transactions and must buy or sell stocks to balance their exposures. Last week for the first time this year, the cohort shifted into a “short gamma” position where their activity has the potential to amplify market swings, according to Goldman Sachs.
With Jackson Hole potentially acting as a volatility-inducing event, any equity pullback can worsen quickly given the stance among dealers, according to Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets.
“There has been a lot of talk of the market flipping from ‘long gamma’ to ‘short gamma,’” she said. “It means that as we sell off we are hitting more points where there are put buyers not put sellers. Put buyers tend to exacerbate negative moves because dealers sell shares.”
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