JPMorgan fund to reset options positions Thursday

NEW YORK - A nearly $17 billion JP Morgan fund is expected to reset its options positions on Thursday, potentially adding to equity volatility at the end of a dismal first half for stocks.

Analysts say that the JPMorgan Hedged Equity Fund has the potential to move markets again this time around, because of the reset roiled markets in the closing hours of the last quarter.

The JPMorgan Hedged Equity Fund holds a basket of S&P 500 stocks along with options on the benchmark index and resets hedges once a quarter. The fund, which had around $16.71 billion in assets as of June 27, aims to let investors benefit from equity market gains while limiting their exposure to stock declines.

The fund was down 9.6% for the year, compared to a 17.6% decline for the S&P 500 Total Return Index.

The investors are seeking protection from wild swings that rocked markets in the wake of the COVID - 19 outbreak in March 2020, and its assets have ballooned in recent years.

Some of the market's biggest names, such as Apple Inc., Microsoft Corp. and Amazon.com Inc., are part of the fund's positions.

The options overlay strategy involves buying put options that make money if the S&P 500 drops 5% or more from its level at the beginning of each quarter. The fund sells puts that would make money if the S&P 500 drops more than 20%, to limit the cost of these put purchases.

The fund sells call options at about 3.5% -- 5.5% above the market level to help fund the cost of the hedge.

The trade is structured so that investors are protected if the market falls 5% to 20%, and they are able to take advantage of any market gains in the average range of 3.5 -- 5.5%. The re-creation of these positions involved around 130,000 S&P 500 contracts in all, which is worth around $20 billion in notional terms.

Options dealers - typically big financial institutions that facilitate trading but seek to remain market-neutral - take the other side of the fund's options trades.

To minimize their own risk, they usually buy or sell stock futures, depending on the direction of the market's move. Such trading related to dealer hedging can influence the wider market, especially if it is done in size, as is the case for the JPM trade.

The S&P 500 Index fell 1.2% in the last hour of trading on March 31 due to lack of any obvious news - a move by some analysts pinned on options hedging flows.

The fund rolls over its options positions and dealers buy and sell futures in order to hedge their exposure and could cause market swings on Thursday, according to traders.

Charlie McElligott, a equities derivatives strategist at Nomura, believes that more volatility and stock weakness could follow after June 30, once the trade is out of the way.

He said that the strategy's puts to the 3,620 level on the S&P 500, the lower leg of the trade, may have lent support to the market during its slide this month.