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Traders at the New York Stock Exchange.


Options trading by retail investors may account for the strength in the

S&P 500

during the morning this year and weakness in the afternoon.

The S&P 500 is up 9% in morning trading so far in 2021, while the index is down 5% in the afternoon, according to a note Thursday from Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group.

Morning trading is before 1 p.m. Eastern time, and afternoon trading is after 1 p.m. ET. Murphy measures morning trading from immediately after the opening print in the S&P 500.

He says the growing presence of retail investors in the options market may be a factor.

Such investors tend to be buyers of call options and engage in day trading, which means they buy in the morning and sell by the close of trading in the afternoon. The morning call buying may be lifting the S&P 500, while the afternoon selling of calls may be depressing the index. Calls, which give holders the right to buy a stock at set price, amount to a bullish bet.

“There has been a lot of discussion around the role of ‘message board’ options trading and its impact on equity markets. One key characteristic of message board trading is high call volume without a significant change in open interest the next day. This is due to opening call buying in the morning followed by closing call selling in the afternoon,” Murphy wrote.

“It’s possible the trend of call buying in the morning followed by call selling in the afternoon is having an impact on this intraday SPX trend,” he continued.

Murphy cited options activity in market leader


(ticker: AAPL) Wednesday, when 122,000 calls with a strike of 146 expiring Friday traded but open interest in that strike only rose by 18,000 contracts. That means 85% of those Apple call positions were closed out intraday. Apple shares closed up 1%, at $146.80, on Thursday.

In 2019, before message-board trading took off, the S&P 500 was up 10% in the afternoon, better than its 5% gain in the morning.

Murphy also notes that implied volatility in Apple call options has tended to rise recently early in the session and then decline in the late afternoon. This apparently reflects a burst of call buying after the opening of trading, followed by a selloff of the calls by day traders before the close. Implied volatility is a key gauge of how expensive options are.

Murphy also notes that the bulk of the change in the S&P 500 has historically occurred overnight, meaning most movement in the index occurs with the opening print. This reflects market-moving news before the opening such as economic news, earnings, and political events.

Over the past year, the S&P 500 is up 28% overnight and has gained just 4% during the daytime trading session.

Write to Andrew Bary at andrew.bary@barrons.com

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