Stock markets may face correction, says Goldman Sachs

By Nell Mackenzie

LONDON (Reuters) - Wall Street stocks could be facing a correction because of ructions in the options market, Goldman Sachs specialist Scott Rubner said in a Thursday note seen by Reuters on Friday.

Roughly $2.7 trillion of U.S. stock market derivatives are due to expire on Friday, which if not exercised, will put pressure on stock markets and stoke volatility, the note said.

WHY IT'S IMPORTANT

S&P 500 and European stock markets hit a record highs on Tuesday but have since declined amid Trump's latest tariff warning on pharmaceuticals, semiconductor chips and wood, which among other threats, has exacerbated fears of a broad trade war and unnerved investors.

Stock buying might be slowing for other reasons, as well. Retail traders in the U.S. are trading less because they'll have to pay their annual taxes, and average flows from retirement funds into mutual and exchange-traded funds typically taper in March, Rubner said.

BY THE NUMBERS

About $2.7 trillion of equity options, or derivatives that allow a trader to bet that a stock will reach a certain price, expire Friday, said the Goldman note.

These derivatives include wagers on the S&P 500, as well as U.S. exchange-traded funds and single stocks.

Banks and intermediaries that help put on these bets have over $9 billion of hedges against these trades. These positions have acted as a dampener on volatility, says the Goldman note, "supporting weakness and muting rallies."

KEY QUOTE

If investors do not return to renew their options bets, then intermediaries also have to unwind their hedges, explains Dan Izzo, founder of the hedge fund BLKBRD Asset Management and a former bank trader.

"That translates as a large momentary pressure. The larger risk is if there's no one willing to buy that impact, we could see it trigger a larger sell off," said Izzo.

(Reporting By Nell Mackenzie, Editing by Amanda Cooper and Philippa Fletcher)