A mysterious trading pattern noticed on Thursday in the shares of four blue-chip stocks was likely an experiment in the automated hedging of large options positions, an analyst at JPMorgan said.
Many investors on Thursday were puzzled by the price action of Coca Cola (KO), International Business Machines (IBM), McDonald's Corp (MCD) and Apple Inc (AAPL), said JPMorgan Securities derivatives strategist Marko Kolanovic.
The prices of the four stocks oscillated in an almost perfect pattern, going up and down at almost exactly the half-hour and full-hour marks, he said. The unusual price patterns started from 10 a.m. Eastern time.
"We believe that the price pattern of Coca Cola, IBM, McDonald's and Apple yesterday was caused by hedging of options by a computer algorithm," Kolanovic said in a report. "In other words, it was likely an experiment in automatically hedging large option positions with a time-weighted algorithm that has gone wrong for the hedger."
The unusual trading occurred a day before Friday's expiration of July options, and the four stocks held some of the largest expiring positions out of all S&P 500 stocks.