NEW YORK - A nearly $16 billion JP Morgan fund is expected to reset its options positions on Friday, potentially adding to equity volatility at the end of a gloomy quarter for stocks.
In the past, analysts pointed to the JPMorgan Hedged Equity Fund's quarterly reset roiling markets and see it as a source of potential volatility during Friday's session.
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 about $15.59 billion in assets as of September 28, aims to let investors benefit from equity market gains while limiting their exposure to declines.
The fund was down 10.66% through September 28, compared to a 21% decline for the S&P 500 Total Return Index.
The fund's assets ballooned in recent years, as investors sought protection from the wild swings that rocked markets in the wake of the COVID - 19 outbreak in March 2020.
Some of the market's biggest names include Apple Inc, Microsoft Corp., and Amazon.com Inc.
The option strategy is used by the fund to protect investors if the S&P 500 falls between 5% and 20%, while allowing them to take advantage of any market gains in the average range of 3.5 -- 5.5%. The fund's options positions consisted of about 140,000 S&P 500 options contracts in all, including S&P 500 puts at strikes 3580 and 3020 and S&P 4005, all for the September 30 expiry.
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.
They usually buy or sell stock futures to minimize their own risk, depending on the direction of the market's move. Such trading related to dealer hedging can influence the broader market, especially if it is done in size, as is the case for the JPM trade.
Chris Murphy, co-head of the derivatives strategy at Susquehanna International Group said the trade is well understood and digested by the market.
According to some analysts, daily moves have exacerbated in the past.
In the last hour of trading on March 31, the S&P 500 Index fell 1.2% due to a lack of any obvious news - analysts pinned on options hedging flows.
Analysts say the refresh could cause market swings on Friday as the fund rolls over its options positions and dealers buy and sell futures to hedge their exposure.
There is a fair amount that needs to be adjusted and hedged to roll the trade, said Brent Kochuba, founder of the analytic service SpotGamma.
The position is expanding volatility this week, according to Kochuba.
After the options position is rolled forward three months, their influence on current price swings should diminish, he said.