A big bet on markets remaining docile has captured Wall Street’s attention, with $350bn fund manager Parametric earning itself the nickname ‘Gamma Hammer’ across trading desks for billions of dollars’ worth of options trades.
People familiar with the fund’s trading activity say it has netted lucrative fees from the strategy of trading so-called gamma, the Greek term used to describe how the value of options fluctuates as stocks move.
The fund manager has been selling options contracts that protect against a near-term jolt in US equity markets to other players on Wall Street, wagering that the rollout of coronavirus vaccines and sizeable stimulus from the US government have quelled immediate risks for the market. By some calculations, the trade’s size is worth roughly $5bn in notional exposure each week.
Alex Zweber, a managing director at Parametric, said the fund had a policy not to discuss specific trades. “In general, our investments are carefully risk managed with a keen eye towards efficient implementation,” he said.
However, if stock markets were to slide or rise swiftly, the strategy could result in heavy losses, and even amplify market volatility as the fund is forced to cover positions.
This year has brought several market shake-ups, including a large drop in government bond prices, a Reddit-fuelled trading frenzy and the blow-up of family office Archegos that has left banks nursing more than $10bn in combined losses. But Parametric, owned by Morgan Stanley following the bank’s acquisition of Eaton Vance, is betting that the stability that has set in across a range of asset classes recently can prevail.
The trade is known as an equity options strangle, and has been executed through Barclays, Citigroup and other large dealers, people familiar with the matter said. The two banks declined to comment.
Options give the buyer the right to buy a stock or an index, known as a call, or the right to sell, known as a put, in exchange for an upfront fee. Call options are effectively a bet or hedge for prices rising, while puts are a bet on a fall.
The Gamma Hammer sells both call and put options on the US benchmark S&P 500 stocks index, creating a channel around its current level.
As long as stocks stick in that channel over the lifetime of the options, Parametric does not need to pay out, and instead pockets the fee. The fund executes the trade multiple times a week — sometimes twice a day — with maturities that range from one week to one month, the people said.
Some of the puts and calls Parametric has sold are just 1 per cent away from the current level of the S&P 500 index, making them simultaneously riskier but more lucrative for the fund, while others are as far away as 10 per cent, people familiar with the trades said.
“This could go wrong [for] the Gamma Hammer and his or her investors if you get a big move,” said Rish Bhandari, a senior portfolio manager at hedge fund Capstone. He added that the trade could “get smoked because you are effectively collecting pennies in front of a steamroller”.
Some traders noted that despite the large trading size, the strategy represents just a small slice of the overall S&P options market. That, traders said, means any systemic impact is likely to be small.
It is not a new strategy for the fund, which employs several systematic and rules-based volatility trading strategies, but people familiar with the activity say the fund pulled back from the market last year because of the market shock stemming from coronavirus. Now, growing confidence in the US economic recovery has teased the Gamma Hammer, alongside other investors, back to the market.
Josh Lisser, head of the index strategies team at AllianceBernstein, noted that short-term contracts with strike prices close to prevailing market levels are “more sensitive” to market moves. “You make money on these until you don’t,” he said.