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We talked last week about the dampening effect that index options expirations on 2/14 had on stock prices—a function of how funds manage assets and insure them with derivative strategies. You may be thinking, "Here comes ModernIR with that options crazy talk again."
Crazy it may be, but the data don't lie. February produced an unusual set of options expiration realities, with various ones expiring from 2/14-2/20 including index and stock puts and calls, ETF puts and calls, and the derivatives that track key volatility measures (these last, which lapsed on 2/20 play a radically larger role now). In the middle of them came a market holiday on 2/18, and broadly, volatility was greatest when? Yup, 2/20, when a gap briefly formed between assets and hedges, so to speak. Ah, the traders' paradise!
Yet also, smart fundamental investors—who've learned the same things we observe—were buying dips during this volatility. No wonder this week stocks are performing better. Is there more clarity in economic conditions? Increased geopolitical stability? A different view of forward corporate profits? Nope. What changed was that fund managers had reset their insurance policies and thus reduced risk.
For crying out loud, what's an IR department to do, you lament? You know we advocate thinking much more tactically about how and when you engage in outreach. It's really as simple as understanding your audience. If you reach out to investors and deliver news and report financial results as a means for communicating with fundamental holders who focus on your business…you're well-advised to do these things when portfolio managers aren't focused on getting their insurance policies reset. It's logical, as Spock would say.
In fact, we believe it's of fundamental importance for IR folks to acquaint themselves with options expirations calendars and, where possible, to avoid engaging in key activities around them that are intended to inform and assist fundamental holders. Otherwise, you limit their ability to respond to your message—so to speak. There's good proof of the soundness of this suggestion in the performance of equities this week.
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