What is really moving markets this summer?
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Want to know what I think caused this latest bear rally?
This chart of SPX is broken into quarters that represent when the very large JHEQX hedge that rolls over the funds put credit spread.
The funds put options netted most of the funds profit in q2 fuelled by sell offs in technology.
In Q1 I thought a market wide sell off would net the fund 2B but Vanna Flows pulled the market out of a steep dive for a march rally.
But high volatility in MAR from news and inflation fears forced short vol liquidations. google “When did VXX stop issuing”… march 15.
I was not charting much in Q2 and didn’t do the PNL for the funds hedge but if I had to guess the put options profit was est of ~1.5B
Seeing that VOL was not as high during Q2 compared to Q1, one would assume less VOL selling.
This allowed markets to decline with out strong reflexive support from VOL selling (everyone buying VOL).
Now that VOL is compressing and SPX has its bucket of shares volatility should return.
My novice understanding of these mechanics are limited here, but my conjecture is that the price will be drawn to between 4005 - 3580.
For reference, the Contract Values and costs on June 30th
Sell 46,000 contracts for 3020P at -28.25 on June 30th +1.3M
Buy 46,000 contracts for 3580P at +119.80 on June 30th -5.5M
Sell 46,000 contracts for 4005C at -93.41 on June 30th +4.3M
This is just one fund. JPM has 2 other similar funds (not as big) that roll over each quarter spaced apart by month.
OI contract sizes are not as large in the other funds (10k-15k) for sequential months, but their effects on liquidity play a role at the end.
Don't take this as investment advice. Do some research and draw your own conclusion.
This chart of SPX is broken into quarters that represent when the very large JHEQX hedge that rolls over the funds put credit spread.
The funds put options netted most of the funds profit in q2 fuelled by sell offs in technology.
In Q1 I thought a market wide sell off would net the fund 2B but Vanna Flows pulled the market out of a steep dive for a march rally.
But high volatility in MAR from news and inflation fears forced short vol liquidations. google “When did VXX stop issuing”… march 15.
I was not charting much in Q2 and didn’t do the PNL for the funds hedge but if I had to guess the put options profit was est of ~1.5B
Seeing that VOL was not as high during Q2 compared to Q1, one would assume less VOL selling.
This allowed markets to decline with out strong reflexive support from VOL selling (everyone buying VOL).
Now that VOL is compressing and SPX has its bucket of shares volatility should return.
My novice understanding of these mechanics are limited here, but my conjecture is that the price will be drawn to between 4005 - 3580.
For reference, the Contract Values and costs on June 30th
Sell 46,000 contracts for 3020P at -28.25 on June 30th +1.3M
Buy 46,000 contracts for 3580P at +119.80 on June 30th -5.5M
Sell 46,000 contracts for 4005C at -93.41 on June 30th +4.3M
This is just one fund. JPM has 2 other similar funds (not as big) that roll over each quarter spaced apart by month.
OI contract sizes are not as large in the other funds (10k-15k) for sequential months, but their effects on liquidity play a role at the end.
Don't take this as investment advice. Do some research and draw your own conclusion.
Note
Thank you for the interest and comments. I'll be posting more about this hedge and similar ones in the coming months. Please remember this information is somewhat speculative and should be used only for educational purposes. With that said. I went ahead and plotted the other 2 major hedges for this fund. The 2 others are smaller in size but have similar effects. When you start to connect the dots, some interesting assumptions can be extrapolated.
Using CBOE option open interest at each of the funds quarterly expiring hedges I’m able to locate where the other 2 hedges are and approx. how many contracts.
JHQAX
Reset in July 29 and Oct 31
~14.5k contracts
Short 4340C
The top of the recent rally touched the the short call.
JHQCX
Resets in Aug31
~14k contracts
Short 4350C
There is also an ETF now that follows this same put spread collar strategy called HEQT.
Using the short call and long put of each months expiring put spread collars I created a band around SPX. You can clearly see the effects these types of hedges have on the overall market providing resistance above and support below.
To put this in perspective, look at the end of each month and take notice that SPX closes at or near the top (short call) or bottom (long put). That would put SPX at 4178 by the end of September.
Note
Correction. SPX @ 4178 by the end of August.Note
Correction. The 2 other Funds from JP Morgan that roll over are JHQDX (6 Billion fund) and JHQTX (3 Billion).
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