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JPMorgan ‘Options Whale’ Worries Resurface as Stocks Extend Drop


(Bloomberg) — To Wall Street worrywarts, a large options position owned by a JPMorgan Chase & Co. equity fund has the potential to add fuel to this sweeping US stock selloff.

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The $16 billion JPMorgan Hedged Equity Fund (JHEQX), a long-stock product that uses derivatives to protect its portfolio from declines and volatility, holds tens of thousands of protective put contracts expiring Friday with a strike price not far below the current level of the S&P 500.

That matters because dealers on the other side of the trade risk unwanted exposure as the expiration nears and the index threatens to drop below the strike price. Should that happen, they’d effectively end up with a long stock position. To hedge that risk, they deploy trades that short the market in order to get back to neutral.

It’s one side of a process called delta hedging, and some market watchers fear it’s a potential accelerator and volatility amplifier for the stock gauge. The S&P 500 slid 0.4% to 4,254.58 as of 12:20 p.m. in New York. The strike price of the JHEQX puts is 4,210.

“The gravitational pull of it is getting stronger and stronger,” said Dave Lutz, head of ETFs at JonesTrading. “If we don’t retake 4,400, it’s the target for Friday.”

JHEQX is known as a whale in the derivatives arena because of its perceived outsized influence. Not only are its concentrated options positions relatively large by standards of the market, its mechanical trading patterns are well known, enabling other players to take advantage.

It’s difficult to conclusively prove that it can influence the market, and JHEQX will be one of many forces at work on Friday. But the quarterly reset of its options position has been shown to coincide with moves in the S&P 500, prompting theories that the fund is at least a contributing factor.

As assets in the product ballooned, JPMorgan Asset Management in 2021 created two sister funds that follow the same strategy but with different options expirations. New cash has since been funneled into those, which now boast combined assets of about $7 billion.

A JPMorgan spokesperson declined to comment on JHEQX’s potential influence on the broad market.

The fund’s derivatives position consists of a put-spread collar that involves buying puts as well as selling bullish calls and even more-bearish puts. At the end of each quarter these positions are often rolled over without incident. Yet the market is particularly susceptible to influence when the S&P 500’s trading level approaches the strike price of any of the legs of the trade around the time of expiry.

The fund’s potential impact is not just volatility inducing. During the equity rally in December, for instance, when the strike price of its call contracts was in play, it was blamed for muting the S&P 500’s movement.

At Monday’s close, there were 55,000 put contracts outstanding with a strike price of 4,210 and an expiration on Friday, according to data compiled by Bloomberg. They have a notional value of $24 billion. As of the end of July, JHEQX held almost 37,000 of them, data shows.

Before it rolled into the options at the fund’s late-June reset, the total open interest for those particular puts was just 26 contracts with a face value of $11 million.

The fund’s positioning is yet another headache for the benchmark US equity gauge, after fears that the Federal Reserve will hold interest rates higher for longer sparked a renewed bout of risk aversion. It adds to a darkening technical backdrop, with investors pulling out of equity funds last week while hedge funds upped their shorting game.

Stocks have been mired in a decline since late July and the S&P 500 has fallen in all but two weeks. Along the way, the index broke through both its 50- and 100-day averages — levels that some technical analysts consider to be points of support.

Not far below the strike price of the JHEQX puts is another big one: the gauge’s 200-day trendline, near 4,190.

A breakdown at the 200-day average would be the first time since March, ending a six-month run of resilience — the longest since the January 2022 peak of the previous bull market. That would signal a deterioration in long-term momentum, potentially forcing rules-based traders like trend followers to cut equity exposure.

After the S&P 500 undercut its 100-day average, commodity trading advisers that surf the momentum of asset prices sold $15 billion of stocks, according to JPMorgan’s equity derivatives trading team, which doesn’t directly manage the JHEQX.

“The large collar (SPX) that is in the market place has a strike around 4,200 which could act as a magnet,” they wrote in a note, without identifying the firm behind the trade.

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