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. An analysis of options trading flows performed by SpotGamma, a provider of data and analytics tied to the market for U.S. equity option contracts, shows a correlation between trading in options on the verge of expiring, and large intraday market swings.
The historic reversal in U.S. stocks seen on Oct. 13, following the release of a monthly inflation report, offered one memorable example of this dynamic, according to SpotGamma founder Brent Kochuba, who shared some of his data with MarketWatch. 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. See: A potential stock-market catastrophe in the making: The popularity of these risky option bets has Wall Street on edge Over the past year, trading in so-called “zero day to expiration” — or “0DTE” — contracts linked to the S&P 500 has surged, according to data from the C …