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Whale’s Resurfacing Shows Danger Persists in the Options Market

Whale’s Resurfacing Shows Danger Persists in the Options Market

(Bloomberg) — Stock traders assessing the looming presidential election and a stalling economic recovery also need to keep an eye on the options market.

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While the frenetic pace of speculation in derivatives has eased a bit recently, it hasn’t stopped, and a chorus of analysts warns the trading remains capable of exacerbating swings in equities. One proxy for the froth still latent in options, the percentage of overall volume represented by single-stock contracts, remains up 19% from a year ago, according to JPMorgan Chase & Co. Most of it is concentrated in megacap technology and momentum-driven shares.

Meanwhile, a large buyer of tech calls dubbed the Nasdaq whale recently resurfaced, purchasing around $200 million worth of call contracts on tech stocks in a single day. The Nasdaq 100 Index has gained in all but two sessions this month and just notched its best week since July after last month’s sharp drop. It’s up 2.2% as of 11 a.m. in New York on Monday.

The situation is another thing for traders to worry about in whipsawing markets where liquidity remains thin. Trading in options showed itself capable of influencing share movement in August and September, when dealer hedging — demand from people who sell options for the underlying stock — created feedback loops that helped drive the Nasdaq 100 higher. That dynamic can also add fuel to downside moves as well as sellers adjust positions.

“This low liquidity environment lays the groundwork for dealer positioning (i.e., gamma imbalances) that can further exacerbate existing market trends,” wrote JPMorgan analysts including Shawn Quigg in a note Tuesday. “Exceptionally large trades in thin markets, especially in sectors (e.g., technology) or investment styles (e.g., momentum) considered overbought or oversold, increase the potential for exacerbated stock moves as dealers hedge exposure.”



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© via Bloomberg

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