With $2.2. Trillion worth of options expires on Friday. Stock investors are bracing up for a chaotic weekend after being on guard as turmoil arises from the Federal Reserve hawkish position on interest rate hikes and the geopolitical situation.
As per estimates by Goldman Sachs, the monthly event involves $545 billion worth of derivatives across single stocks that are set to expire. The firm’s strategist Rocky Fishman believes that $165 billion in options in SPY and $985 billion S&P 500 linked contracts will expire.
The impact of expiring options on stocks is to quantify
Options impact on stocks is not easy to quantify still the equity indexes, which had shown a definite pattern last year, now lurches towards lows on the third Friday when many stocks derivatives expire. The volume is whipped up this time by traders looking for protection after the S&P 500 index swung by more than 1% in almost all sessions in February.
According to Steven Sears, president of Options Solutions, an asset management firm, people hold on to short expiry options till the bitter end before trying to herd exit from the tiny door on the closing date.
With Fed expected to hike rates in March after three years, the demand for bearish options has been growing among the crowd for whom bullish contracts were a choice before.
The put open interest on SPY climbed to a two-year high after sell-off across assets, whereas the high yield Corporate Bond HYG from iShares iBoxx surged to a new high.
As per Bloomberg News, individual stocks displayed similar caution as the 20 days put-call ratio for equities hovered at the highest level in almost two years. Retail traders are buying puts, and hedge fund short-sellers are reloading faster.
The rush for protection is one reason why S&P 500 has held on so far above its bottom level last month despite heightened Ukraine and Russia tension and aggressive rate hikes lined up this year. After a two-day advance, the S&P index fell by 1.9% in New York.
Piper Sandler & Co. Options Head Danny Kirsch feels that the market is relatively well hedged and with little downside despite negative headlines; it remains to be seen how things shape after the expiry this month.
Investors are hardly backing out despite skeptical sentiments in the derivatives market. On the contrary, they poured funds worth $34.1 billion into large-cap stock funds in the U.S. as per EPFR Global data released by Bank of America.
As per Nomura Holdings cross strategist Charlie McElligott, Friday’s unwinding of options position by dealers will propel equity gains. Also, the current short Gamma position will require them to go with the prevailing market trends: buy stocks when they go up and sell when the stocks fall.
