Explained: How massive options trading by the JP Morgan Fund can move the markets

NEW YORK, Sept. 29 (Reuters) – JPMorgan’s $15 billion fund is expected to reset options positions on Friday, which could add to equity volatility at the end of a strong quarter for US equities.

Analysts have in the past pointed to a reset in distressed markets for the JPMorgan Hedged Equity Fund, and view it as a source of potential volatility during Friday’s session.

What is a JPMorgan Equity Hedge Fund?

The JPMorgan Hedged Equity Fund holds a basket of S&P 500 .SPX stocks along with options on the benchmark index and resets the hedge once every quarter. The fund, which had about $14.71 billion in assets as of March 29, aims to allow investors to take advantage of stock market gains while limiting their exposure to declines.

For the year, the fund is up 5.71% through March 29, compared to a 5.35% gain for the S&P 500 Total Return Index.SPXTR.

The fund’s assets have swelled in recent years, as investors sought protection from the kind of extreme volatility that rocked markets in the wake of the COVID-19 outbreak in March 2020.

Its holdings include some of the biggest names in the market, such as Apple Inc AAPL.O, Microsoft Corp MSFT.O, and Amazon.com AMZN.O.

How does the fund use options?

The fund uses an options strategy that seeks to protect investors if the S&P 500 falls between 5% and 20%, while allowing them to take advantage of any market gains in the middle 3.5-5.5% range.

On December 30, the fund’s options position update included about 125,000 S&P 500 options contracts in total, including the S&P 500, put strike prices of $3,060 and $3,600 and calls at $4,065, all Expires March 31st.

How could this affect the broad market?

Options traders – usually large financial institutions that facilitate trading but seek to remain market neutral – take the other side of fund options trades.

To reduce their risk, they usually buy or sell stock futures contracts, depending on the direction of the market movement. Such trading associated with hedging dealers has the potential to influence the broader market, especially if it is done with volume, as is the case for JPM trading.

While the trade is well known and expected by most market participants, it can exacerbate daily stock market movements, especially during times of poor market liquidity, analysts say.

(Covering) By Saqib Iqbal Ahmed in New York; Editing by Ira Yosbashvili, Matthew Lewis, and Nick Siemensky

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