In the realm of Wall Street concerns, a significant options position held by a JPMorgan Chase & Co. equity fund is raising eyebrows and is seen as a potential factor amplifying the ongoing stock selloff in the US.
This position is associated with the $16 billion JPMorgan Hedged Equity Fund (JHEQX), a long-stock product that utilizes derivatives to safeguard its portfolio from declines and volatility.
The JHEQX fund holds tens of thousands of protective put contracts set to expire soon, and these contracts have a strike price not far below the current level of the S&P 500 index. As the expiration date nears and the index flirts with dropping below the strike price, dealers on the opposing side of the trade face unwelcome exposure. To hedge this risk, they execute trades that short the market to return to a neutral position.
This practice, known as delta hedging, concerns some market observers as it could potentially accelerate and amplify volatility in the stock market. The S&P 500 index has already experienced a decline, and the JHEQX puts have a strike price of 4,210, which is significant.
Market experts emphasize the potential influence of the JHEQX fund, often referred to as a whale in the derivatives arena due to its perceived outsized impact. Its sizeable concentrated options positions and predictable trading patterns make it a noteworthy player, and its quarterly options position reset has been noted to coincide with movements in the S&P 500, fueling theories that the fund is a contributing factor to market dynamics.
While it's challenging to definitively prove the fund's influence on the market, its actions will be closely watched, especially around options expiration dates. The JHEQX fund's impact goes beyond inducing volatility and has been associated with influencing the S&P 500's movement in the past.
The options held by the JHEQX fund are a source of concern for the US equity benchmark, particularly amid fears that the Federal Reserve may maintain higher interest rates for an extended period, sparking risk aversion. This adds to the overall negative technical backdrop, with investors pulling out of equity funds and hedge funds increasing their short positions.
The stock market has been in decline since late July, breaking through crucial technical levels, including the 50- and 100-day averages, which are considered support points by technical analysts. Notably, the strike price of the JHEQX puts aligns closely with the S&P 500's 200-day trendline, further underlining its potential significance.
If the S&P 500 breaches its 200-day average, it would mark a significant departure from the resilience observed in recent months, potentially indicating a shift in long-term momentum. This could prompt rules-based traders like trend followers to reduce their equity exposure.
After the S&P 500 fell below its 100-day average, commodity trading advisers, who ride the momentum of asset prices, sold $15 billion of stocks. This emphasizes the impact of key technical levels and options positions on market dynamics and investor behavior.
Source: by Lu Wang Contributor at Bloomberg