Giant Options Trades Fuel Market Pullback

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Heavy options activity is amplifying this week’s frantic investor retreat from bets on stronger economic growth.

The S&P 500 dropped 1% Friday afternoon, putting it on track for its worst one-day performance in over a month, while the Dow Jones Industrial Average was headed toward its worst week since January. Lumber prices were on pace to lose 18% for the week, the biggest such fall since January and one of the largest on record. Gold and copper both posted their largest one-week percentage declines since March 2020.

The stock-market volatility coincided with a rush of options activity, with more than 116 million options contracts set to expire on Friday, according to Cboe Global Markets data, the second-highest level ever after Jan. 15, when more than 150 million contracts were expiring.

Spurring the selling were comments from Federal Reserve officials that have slightly stepped up investors’ expectations for future rate increases. The Fed’s projections released Wednesday pointed to the prospect of two rate increases in 2023, and Federal Reserve Bank of St. Louis President James Bullard said Friday that the central bank could tighten policy as soon as next year.

The comments wrong-footed a market that had become obsessed with the threat of inflation. Volatility rose after slipping throughout the spring, and the asset class that many investors had bet was due to post the steepest drop, U.S. Treasurys, rallied. The 10-year yield fell as low as 1.441% Friday, down from around 1.58% last month.

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