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ETF to Cover $8 Billion in Short Options and the Market Knows It

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(Bloomberg) — The Nasdaq’s November rally is set to get an extra boost this week from investors front-running an ETF’s option expiration.

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The $7.7 billion Global X Nasdaq 100 Covered Call ETF sells call options on the Nasdaq 100 to increase returns from the performance of shares in the index. Thanks to the technology benchmark’s almost 10% rally since late October, the ETF’s short position expiring Friday is now well below the index’s current level, meaning the fund will need to buy thousands of futures contracts to cover.

The fund, which follows a covered call or buy-write strategy, according to its prospectus, sells a succession of one-month call options each calendar month on the reference index covers such options by holding the underlying. The holdings are known to the market, offering an opportunity for traders to buy ahead of the ETF.

“The market has gotten the joke and pre-traded or front-run the delta”, wrote Nomura strategist Charlie McElligott in a note to clients on Friday as he calculates that the transaction will create about $8 billion in Nasdaq futures to be bought as the hedge comes off.

Bloomberg’s holding data for the ETF currently shows a short position of 5,280 contracts of the Nasdaq 100 14,600 calls expiring Nov. 17, and no futures contracts.

Since January 2022, there have been seven occurrences where the ETF had to unwind calls that where at last 105% in-the-money. The last six of them have all seen the Nasdaq trade higher the week into the cover of the position with an average return of 2% over the week, McElligott said.

The Nasdaq was little changed early Monday after rallying 2.3% Friday to the highest closing level since early August.

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