Stock Markets May Face Correction, Says Goldman Sachs
LONDON (Reuters) – Wall Street stocks could be facing a correction due to turbulence in the options market, according to a note by Goldman Sachs specialist Scott Rubner seen by Reuters. Approximately $2.7 trillion of U.S. stock market derivatives are set to expire on Friday, which, if not exercised, will exert pressure on stock markets and increase volatility.
Why It’s Important
The S&P 500 and European stock markets reached record highs on Tuesday but have since declined following Trump’s latest tariff warning on pharmaceuticals, semiconductor chips, and wood. This, along with other threats, has heightened fears of a broad trade war and unsettled investors. Additionally, retail traders in the U.S. are trading less due to annual tax payments, and average flows from retirement funds into mutual and exchange-traded funds typically decrease in March, Rubner noted.
By the Numbers
About $2.7 trillion of equity options, or derivatives that allow traders to bet on a stock reaching a certain price, expire on Friday. These derivatives include wagers on the S&P 500, as well as U.S. exchange-traded funds and individual stocks. Banks and intermediaries that facilitate these trades have over $9 billion of hedges against these positions. These hedges have acted as a buffer against volatility, supporting market weakness and dampening rallies, according to the Goldman note.
Key Quote
If investors do not renew their options bets, intermediaries will need to unwind their hedges, explained Dan Izzo, founder of the hedge fund BLKBRD Asset Management and a former bank trader. “That translates to a large momentary pressure. The larger risk is if no one is willing to absorb that impact, we could see it trigger a larger sell-off,” said Izzo.
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