Funds selling options help temper U.S. stock swings

in U.S. stocks, extending the calming effect they have had on the market for the last several months.

The trades may also have moderated recent volatility as the VIX has climbed to hover near a seven-week high of 16.92 hit on Friday, on mounting worries the Federal Reserve may not deliver as many rate cuts as expected without an inflationary rebound. “There’s been tremendous growth in these ETFs, QIS and in mutual fund strategies that have been selling options for income,” Kosoglyadov said. “We see it every day. It definitely has a pronounced impact on the market.”

Market makers - institutional players such as big banks - taking the other side of these trades often hedge their exposure to the bullish contracts by selling stock index futures. When markets grind higher, as they have in recent months, the ETFs are forced to buy back the call options they sold, prompting market makers to close their own hedges by buying index futures, thereby supporting stocks.

While these options-selling strategies work in the background to temper market moves, they alone would probably not prevent a selloff if the outlook for stocks radically changes, said UBS equity derivatives strategist Maxwell Grinacoff.One potential flashpoint comes on Wednesday, when the U.S. will report consumer price data for March.

Grinacoff and other options market participants are skeptical the current crop of options-selling funds pose the same sort of systemic risk since they are structured differently and less concentrated in their positioning than past funds.

Market Income Stock Options Fund Funds Grinacoff Nomura Morningstar UBS

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