How Is JP Morgan Controlling the Market?

At the end of a bleak quarter for equities, a roughly $16B JP Morgan fund should reset its options bets on Friday, potentially increasing equity volatility.

Analysts have previously noted how the quarterly reset of the JPMorgan (NYSE: JPM) Hedged Equity Fund stirred up the markets and believe it will do so again on Friday. The JPMorgan Hedge Equity Fund resets hedges every three months and has options on individual S&P 500 companies and benchmark indices. The goal of the fund, which as of September 28 had assets worth around $15.59B, is to help investors take advantage of equity market gains while reducing their exposure to decreases.

The Influence on Market?

Through September 28, the fund has lost 10.66% for the year, as opposed to a 21% loss for the S&P 500 Total Return Index.

The fund’s assets have exploded in recent years as investors seek protection from the kind of volatility that rocked markets after the March 2020 COVID-19 outbreak. Some of the largest names in the market are among its holdings, including Apple Inc., Microsoft Corp., and Amazon.com Inc. (NASDAQ: AMZN). The fund employs an options strategy to safeguard clients from losses of between 5% and 20% in the S&P 500 while enabling them to profit from market gains in the typical range of between 3.5 and 5.5%.

Approximately 140,000 S&P 500 options contracts were engaged to refresh the fund’s options position on June 30. These contracts included S&P 500 puts with strikes of 3580 and 3020 and calls with 4005 for the September 30 expiry. The fund’s option trades are on the opposite side by options dealers. It frequently has sizable financial firms that assist trading while attempting to maintain market neutrality. They often purchase or sell stock futures, depending on the direction of the market’s movement, to reduce risk. When dealer hedging trading is in large quantities, as in the JPM trade, it can impact the larger market.