Goldman Brushes Aside Stocks’ Volatile Day as Mere Options Noise

The Goldman Sachs Group Inc. logo is displayed at one of the Goldman Sachs offices in Singapore. (Photographer: Nicky Loh/Bloomberg)

Goldman Brushes Aside Stocks’ Volatile Day as Mere Options Noise

Don’t read too much into the stock market’s volatility Friday, especially when it comes to the technology giants.

That’s Goldman Sachs Group Inc.’s advice. Why? Because it’s likely just a short-term side effect of a record surge in options trading this month.

Open interest in at-the-money options, meaning those at or near the current stock price, that expired on the last trading day of the week could be causing some choppiness, the bank said in a report Friday. That’s because in instances where there are large amounts of such activity, delta-hedging -- which refers to a type of options market price drift that sellers attempt to offset -- can impact the underlying stock’s trading.

If traders who delta-hedge their positions are net long the at-the-money options, expiration-related flows could dampen stock price movements, causing the stock to settle near the strike price with large open interest (Such a situation is often referred to as a pin). On the other hand, hedging activity by those who are net short could exacerbate stock price moves.

“Market makers delta-hedging their unusually large options portfolios will be active. This flow is likely to dampen volatility in some names while exacerbating stock price moves in others,” wrote the Goldman strategists led by Vishal Vivek.

Goldman Brushes Aside Stocks’ Volatile Day as Mere Options Noise

Expiration-related activity could have more of an impact if the open interest represents a big percentage of the stock’s volume, Vivek and his team said. They identified a list of stocks that could potentially have significant expiration-related flow, including Molson Coors Beverage Co. (TAP), Dexcom Inc. (DXCM), PVH Corp. (PVH), 3M Co. (MMM) and Hershey Co (HSY).

Overall, options trading activity has surged in July, driving the month-to-date average daily notional amount traded to a record, according to Goldman. Roughly $534 billion of options have changed hands on average each day this month, with more than half of that happening in call options. That’s above last year’s average of around $367 billion. The strategists say investors have increasingly focused on trading short-dated options. Those with less than two weeks to expiry make up three-quarters of all trades.

And much of it’s been concentrated in just a handful of stocks, with more than 60% of the total traded in July attributable to just five names -- Amazon.com Inc., Tesla Inc., Apple Inc., Nvidia Corp., and Alphabet Inc. Near 90% of all trading this month has been concentrated to 50 stocks, Goldman said.

Goldman Brushes Aside Stocks’ Volatile Day as Mere Options Noise

Meanwhile, strategists at Susquehanna International Group also point out that call volumes in tech names have been rising. Bullish options in Amazon.com have seen a “notable increase” while those in Apple hit a 2021 high earlier this week, wrote the firm’s Christopher Jacobson in a note Thursday.

The heightened activity is helping to drive implied volatility higher even as the stocks have rallied in recent weeks, Jacobson said. “Given the role that these heavily-weighted names have played in driving strength at the broader index level, we find the activity worth monitoring.”

©2021 Bloomberg L.P.

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