Trump Stand-Down Comes In The Nick Of Time For The Stock Market

Authored by Simon White, Bloomberg macro strategist,

President Trump’s announcement that Iran and the US are having “good” talks has taken stocks away from immediate danger due to option dealers’ hedging.

But we are not out of the woods, with a situation that remains highly fluid.

The turnaround came in just in time.

The S&P was approaching levels that would soon force option dealers to sell the market in notable size.

With good news in short supply until just now, it’s little wonder yields were higher and stock lower everywhere.

Now everything that was falling is rising, and vice versa.

Trump is well known to be alert to the message coming from the markets.

That was about to get uglier. Gamma in the S&P is now firmly negative, increasing the chance of larger swings to the upside and downside, but with vol in an uptrend, and still plenty of potential for geopolitical tensions to keep it that way, declines are more likely.

With gamma negative, dealers in the aggregate have to net sell equity futures as the market falls to hedge the puts that they are short.

Coming into view is a large put position at 6,475 strike as part of JPMorgan’s Hedged Equity Fund put collar. The strategy buys a put collar at the end of each quarter, ie sells a put and buys a put with a strike range of ~3%-5%, expiring at the end of the next quarter.

We can see how large that position it is by looking at the OPX function on Bloomberg for the SPX. There’s $2.1 billion of put gamma expiring at 6,475 strike on the 31st March [ZH: The JPM Collar put strike].

Before Trump’s comments, the S&P was on track to open around that level, with futures down 1%.

The closer we are to that strike, and the nearer we are to the 31st March expiry date, the more dealers would have to sell to hedge the 6,475 put.

The tone is more upbeat now.

But it would be naïve to assume the situation will now be resolved to the satisfaction of all the main combatants and victims of hostilities.

Further, negative effects from higher energy prices are now baked in. Stock dynamics will continue to remain negative while an abundance of potential pitfalls remain ahead.