U.S. stocks are poised to experience large swings in the days and weeks ahead as heavy trading in equity option contracts continues to contribute to choppy price action, especially on days that feature the release of crucial economic data like Friday’s monthly jobs report, or Tuesday’s reading on the consumer-price index.
Something similar played out on Feb. 1, when the Federal Reserve announced its most recent 25 basis point interest-rate hike. The S&P 500 fluctuated within a range of almost 3 percentage points that day, according to FactSet data, buffeted by trading in option contracts on the verge of expiring. Conversely, when stocks tumble, tactical traders buy calls and sell puts, helping to drive the market higher. Kochuba illustrated the dynamic in the chart below, which shows how large intraday swings in the S&P 500 often correspond to heavy option trading flows.
The S&P 500 recorded 122 daily moves of 1% or greater in either direction last year, the most since 2008 and nearly double the 20-year average of 65.6, according to Dow Jones Market Data.