August 2020 – Monthly Commentary
As we close out summer and the final month of the third quarter, the bond market has been relatively stable compared to the bipolar volatility of the stock market. Earlier this month, stocks suffered an unexpected downdraft after rising steadily from the March low. Speculation is that a sizeable Asian-based hedge fund had bought call options on a number of the largest tech equities. To hedge the sale, the counterparties bought the underlying stocks and inadvertently created a virtuous circle of buying. Once the hedging was complete, sellers stepped in to take advantage of the unexpectedly attractive prices. While difficult to quantify the size of the trading, judging by the run up in stock prices and measures of option value, there seems to some inkling of truth to the theory.