- Investors are watching with growing concern as an avalanche of US$2 trillion worth of options are due for expiry today, possibly upsetting what has been a relatively quiet August for traders.
- But some analysts are warning that investors have not priced in the risk that options liquidity will evaporate at a time when the market needs it the most.
Investors are watching with growing concern as an avalanche of US$2 trillion worth of options are due for expiry today, possibly upsetting what has been a relatively quiet August for traders.
Some believe that derivatives have helped to reduce market volatility, compelling rules-based trading firms to buy shares to hedge their positions where they otherwise wouldn’t, but at the same time, luring investors into the market, betting on a more dovish U.S. Federal Reserve.
But some analysts are warning that investors have not priced in the risk that options liquidity will evaporate at a time when the market needs it the most.
Inflation and employment data, central banker conclaves and the Fed’s rate-setting meeting in September could see a volatile several weeks for markets, in stark contrast to August.
With US$2 trillion worth of options set to expire, it remains to be seen whether these contracts will get rolled over.
It’s estimated that around US$7 trillion in market cap has been restored since mid-June as what started off as a short squeeze quickly led to a buying spree driven by other investors fearing a durable rally that they may be left out of.
As a result, traders in so-called “long gamma” positions, were forced to buy stocks, so as to remain directionally neutral, which has helped to keep markets stable so far.
Overall bullish contracts have changed hands faster than bearish contracts, which should set the scene for stocks to push higher so that these options contracts will be in the money.
