As institutional investors look ahead to the New Year, Minah Kim, senior director, equity products, at CME Group, explains why an increasing number of European investors are turning towards S&P 500 options outside US trading hours.
2023 saw ongoing geopolitical turmoil, high inflation, and an increasing fear of a recession. As such, risk management very much came to the fore. In an increasingly unpredictable world, the last 12 months marked a major turning point for institutional investors as they tried to figure out how to respond to unexpected market-moving events like geopolitical shifts or the collapse of Silicon Valley Bank (SVB) – stark reminders of the value of risk management in this era of uncertainty.
Despite the cocktail of economic headwinds over the past year, the S&P 500 enjoyed a surprisingly strong 2023 – up 18% to date and primarily boosted in gains in the “magnificent seven” stocks. The intrinsic value placed on managing risk can be drawn from a significant trading surge in our S&P 500 options markets. A staggering 686,000 equity index options were traded on our exchange in non-US trading hours (5 pm-8 am central time) on 13 March 2023 as investors reacted to the news about SVB, and US regulators announced emergency overnight measures to protect depositors and stem contagion in the wider banking sector. This wasn’t an outlier either. On the night that Russia invaded Ukraine in February 2022, nearly 560,000 E-mini S&P 500 options contracts were traded on our markets before the US equity market opened.
With an increasing need to respond to market-moving events as soon as they unfold, investment managers across Europe, particularly those managing large and diverse portfolios, are continuously trading during non-US hours. This allows them to adjust positions and hedge against adverse price gaps, better managing their risk and protecting and optimising their portfolios.
However, the fact that E-mini S&P 500 options average daily volume (ADV) during non-US hours has grown more than 300% since 2017, suggests that it is not just the odd shock event that is driving investor interest but the ability to manage risks around key macroeconomic events as well. A prime example is an announcement from a central bank such as the Federal Reserve’s “higher for longer“ statement in December 2023.
“With an increasing need to respond to market-moving events as soon as they unfold, investment managers across Europe, particularly those managing large and diverse portfolios, are continuously trading during non-US hours.”
Another crucial time for institutional investors is earnings season, which is just around the corner. Options trading during non-US hours may be part of a strategy to manage risk or take advantage of anticipated price movements based on earnings reports, especially if the release of worse-than-expected financials occurs outside of regular US trading hours. Events of 2023 have proven that no corner of the world is immune to turbulence, and institutional investors must remain agile. The past year has also demonstrated the global significance of the CME Group equity index markets, specifically the E-mini S&P 500 options contract, as investors in Europe and throughout the world trade in record numbers to manage risk across time zones.
2024 will undoubtedly bring its own set of challenges and surprises, but also opportunities. According to Goldman Sachs, the S&P 500 is forecast to return 6% in 2024. While J.P. Morgan Research estimates 2–3% earnings growth for the S&P 500. To express a view on where the S&P will go, institutional investors must remain vigilant, equipped and prepared for the unexpected. Turning to equity options outside of US equity market hours is not just a prudent choice, it is now an imperative one to help investors effectively manage risk. By doing so, these investors can confidently navigate the complex and unpredictable terrain of modern financial markets, helping to ensure their portfolios remain robust and resilient in the face of uncertainty.
Minah Kim is senior director, equity products, at CME Group.
© 2024 funds europe
