What's in Store Tomorrow - The JPM Collar Trade?

Quiet Times in the Equity Market

The past week has seen a significant lull in the equity market, with the SPX showing a range of only 0.75% over the last six sessions. This quiet period was further highlighted by the 0DTE SPX at-the-money straddle on Friday, which was a mere $25.5 (45bps) ahead of a crucial Core PCE data print. This low pricing is indicative of traders' belief that the market will continue to remain stagnant. However, at SpotGamma, we believe that a significant change is on the horizon.

Introducing the JPM Collar Trade

The JPM Collar Trade, one of the most well-known option trades, is set to shake things up. Every quarter, a large JPM Hedge Fund (JHEQX) sells approximately 40,000 contracts of an out-of-the-money call to fund a long put spread. Currently, they are heavily short on 40,000 contracts at the 5,750 strike, which is set to expire tomorrow, Monday, 9/30. This large short call position means dealers are long on a significant amount of Gamma, as can be seen on our TRACE heatmap and strike plot.

SpotGamma's TRACE

TRACE, powered by SpotGamma's new proprietary open interest models, allows us to show you the latest in dealer hedging flows. These flows update throughout the day, enabling you to see changes as they happen. This means that when the existing JPM positions are closed tomorrow and rolled to new December strikes, you'll be able to witness it in real time. Additionally, you'll be able to see how it changes the dealer hedging position.

Why Does This Matter?

We believe these trades will lead to an increase in S&P 500 volatility. If one subscribes to the idea that positive Gamma is linked to low volatility, then the removal of a large amount of positive Gamma (in this case, JPM's short call) should pave the way for increased volatility. This is exactly what is set to happen on Monday, as the current JPM call is going to be closed and "rolled up and out." The new call is expected to be changed to a ~5% higher strike, out in Dec '24. This means there will be far less positive Gamma in the new position compared to the current position, which expires tomorrow. Therefore, this expiration should allow for market movement to expand, suggesting that starting Monday, the SPX will start moving and TRACE will guide us through this change.

Want TRACE on Your Side?

If you want to have TRACE in your corner as this change happens in real time, then now is the time to sign up for our “Alpha” plan. This plan includes TRACE access along with a host of other real-time indicators and volatility tools.

Bottom Line

The JPM Collar Trade is set to bring about a significant change in the equity market, potentially leading to an increase in S&P 500 volatility. This change could be a game-changer for traders, but only time will tell if this prediction holds true. What are your thoughts on these upcoming changes? Do you believe the market is set for a shake-up? Share this article with your friends and let us know your thoughts. Remember, you can sign up for the Daily Briefing, which is available every day at 6 pm.