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JPMorgan to SocGen Tout Hedges as US Stocks Mask Big Risks

JPMorgan to SocGen Tout Hedges as US Stocks Mask Big Risks

Thursday, 05 September 2019 09:24 AM

An awful lot of strategists are recommending hedges on U.S. equities right now.

JPMorgan Chase & Co. suggests bearish options on the SPDR S&P 500 ETF Trust, citing concern the market may be underpricing risks that a deterioration in corporate America’s health could hurt jobs. Bank of America Merrill Lynch is touting puts because its model suggests increasing risk for the S&P 500. And Societe Generale SA and Credit Suisse Group AG see some options tied to the index that are too cheap to pass up.

The recommendations come after a turbulent August that saw markets gyrate on developments related to the U.S.-China trade war, tweets from President Donald Trump and comments from Federal Reserve officials. The S&P 500 gained 1.1% on Sept. 4 to within 3% of its July peak, and futures rose Thursday morning on news that the U.S. and China will meet for trade talks early next month.

JPMorgan strategists Shawn Quigg and Marko Kolanovic say buying protection may be rewarding amid a likely weakening in the jobs data. Softening unemployment figures could weigh on equities, and options are pricing a move on the SPY ETF of about 1% through Sept. 6, which they deem as cheap.

Trade ideas from the firms include:

  • JPMorgan: Buy Sept. 6-expiry SPY $292 put options
  • BofAML: Buy one S&P 500 October 2,825 put, selling two 2,700 puts and buying one 2,575 put
  • SocGen: Sell one S&P 500 95% put with a December 2020 maturity, while buying 4.5 times the 70% put
  • Credit Suisse: Hedge with SPY put strategies

Meanwhile, Morgan Stanley strategists including Phanikiran Naraparaju and Sheena Shah took a globally cautious view. They are strategically bearish and recommend buying puts on a basket of global equity indexes because August’s volatility will persist, they wrote in a Sept. 4 note

SocGen Financial Engineer Aymen Boukhari notes that short-term S&P 500 volatility skew is very steep, meaning puts are in demand relative to calls. Far out-of-the-money puts are very cheap compared with at-the-money puts, Boukhari said by email.

Credit Suisse’s Mandy Xu also says relative cheapness in puts that are far below current index levels with three-month expiry and shorter, amid little demand for the far out-of-the-money tails versus greater popularity of options closer to index levels.

BofAML’s models of market stress are flashing caution, causing strategists led by Lars Naeckter and Stefano Pascale to advice hedging bullish wagers.

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An awful lot of strategists are recommending hedges on U.S. equities right now.
jpmorgan, socgen, hedges, stocks, risks
Thursday, 05 September 2019 09:24 AM
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