Saqib Iqbal Ahmad

NEW YORK (Reuters – Traders cite a large quarterly options trade they claimed was from a JPMorgan Fund (NYSE) as the reason the stock market plunged late on Thursday. This is because options flows tied to that trade exacerbated market weakness.

In the final hour of trading, the index fell 1.2%. This was the biggest hourly decline in three weeks. It ended the day at 1.56%. Many attribute the part weakness to the large option trade that fell earlier in day.

Kochuba (founder of SpotGamma’s analytic service SpotGamma), stated, “I believe that trade exacerbated volatility,” noting that this is unusual considering that the quarterly hedging activity usually does not move the markets much.

SpotGamma’s Kochuba explained that the way trades are structured is such that options dealers (typically big financial institutions which facilitate trading but want to be market neutral) would have had to sell more stock futures when the market begins to fall.

A volatile quarter, Russia’s invasion and volatility in commodities prices have caused markets to experience a rollercoaster quarter. In addition to the U.S. Federal Reserve raising interest rates, it has also contributed to volatile market conditions. The cause of Thursday’s initial market weakness in the late afternoon that led to the sudden selling out of stock futures was not clear.

The trade, which took place shortly before 11:00 am, was a large collar options trade, involving the sale of about 44,000 June calls and the purchase of an identical number of June put spreads, that would pay up if the S&P 500 were to decline more than 5% from its current level. An option hedge strategy that involves combining calls and puts, a collar can be described as a combination of both.

The trade also involved the sale of about 24,800 calls linked to the 4,300 level on the S&P 500, set to expire at the end of Thursday’s session, as a way to guard against any sharp moves in the market during the trading session.

The $19 billion JPMorgan Hedged Equity Fund was cited by traders as the reason for the movements. The fund, which holds a basket of S&P 500 stocks along with options on the benchmark index and resets hedges once a quarter. Because the fund is large traders are able to anticipate its movements and know what it looks like.

Kochuba stated that the JPMorgan Hedged Equity Fund initiated the trade based upon past trading patterns as well details about investment strategies set out in its prospectus.

Joe Tigay is the Equity Armor Investments portfolio manager.

Kristen Chambers (JP Morgan Asset Management spokesperson) confirmed that there is a planned quarterly hedging plan, but didn’t confirm details.

Systemsatic traders are usually hedge funds and take a rules-based approach when investing. This means that they often have fixed quarterly investment schedules, rather than strong investment themes.

Other investors do not try to interpret signals from their selections of expiration dates or strike prices, just as discretionary investors would.

Chris Murphy of Susquehanna International Group’s derivatives strategy said, “This is an automated trade that we see every quarter.”

According to Trade Alert data, Thursday’s trade is worth approximately $20 billion (in nominal terms) and replaces an identical position that was opened at the quarter end.