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FILE PHOTO: A man walks near Nasdaq MarketSite in an empty Times Square (REUTERS)
FILE PHOTO: A man walks near Nasdaq MarketSite in an empty Times Square (REUTERS)

JPMorgan says big options bets swing stocks in thin markets

Low liquidity can leave stock markets particularly vulnerable to exaggerated moves around big options trades, according to JPMorgan Chase & Co.

Low liquidity can leave stock markets particularly vulnerable to exaggerated moves around big options trades, according to JPMorgan Chase & Co.

Large options volume has attracted investor attention in recent days -- first as volatility started to rise along with equities, and then on reports that Softbank Group Inc. and others plowed billions into the derivatives. One big concern, according to JPMorgan derivatives strategist Shawn Quigg, is that liquidity remains thin.

“Exceptionally large trades in thin markets opens the door for larger swings in dealer gamma positioning, particularly when executed in style factors/sectors that may already be considered overbought/sold," Quigg said in an email Wednesday. Gamma refers to the option price drift that dealers seek to offset by buying or selling the underlying stock. “This increases the potential for exacerbated stock moves as dealers hedge exposure."

How options influence the stock market has become a pressing question lately, with some analysts saying the precipitous rise of U.S. tech giants in 2020 is mainly because of dealers hedging the other side of those trades.

But others are skeptical: Benn Eifert, chief investment officer at QVR Advisors, said day-traders had a much bigger effect. John Griffin, a finance professor at the University of Texas at Austin known for flagging suspect activity in the VIX and studying Bitcoin, said he doubts one investor could be responsible for the moves in such liquid tech stocks.

While retail traders may have played a role, they weren’t the main driver, Quigg said.

In the wake of the recent multi-day selloff, investors can take advantage of rich volatility -- particularly in technology and momentum stocks -- by selling put options, he said.

Quigg and colleague Peng Cheng recommended tail protection in a note Thursday: selling 1x three-month at-the-money puts on the Invesco QQQ Trust Series 1 while buying three-month 90% puts for zero cost up front, they said.

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