What the heck is the "JPM Collar" anyway?
And why does he talk about it?
Some of you may have noticed in my AM note today (and in other notes) I mention the “JPM Collar” or other ‘overwrite funds’ (sometimes lumped together with bank products and called “structured products”). My aim here is not to write the definitive piece on the subject - rather it’s to introduce some of you to the topic in general and to the JPM Collar in particular (I’ll be using AI some to explain the basic concepts). Also, my typing sucks (avg 2 typos per 4 letter word).
JPM Collar is a HF managed by JPM that sells a collar vs a basket of stocks (basically the SP500) the last day of the month 90 days out in time. (see below):
The JPM Collar Fund is officially known as the JPMorgan Hedged Equity I Fund, and its ticker symbol is JHEQX. This fund uses an options collar strategy to hedge against market volatility while maintaining equity exposure.
basic strategy: Summary (You can skip this or skim if you want)
JPMorgan Hedged Equity continues to deliver on its promise of a low-volatility portfolio that can help investors stay the course during volatile markets. Consistent implementation by an experienced team and a reasonable fee add to its strengths.
The strategy cushions downside loss by forgoing some upside returns. Every three months, it layers S&P 500 options on top of an equity portfolio that closely hugs the index. To offer downside protection, the managers buy put options with strike prices 5% below the S&P 500’s market value. They pay for part of that purchase with proceeds from selling put options 20% out of the money. This structure should protect the fund from losses between 5% and 20% during the options’ three-month period. If the index falls less than 5%, the fund should closely track the S&P 500. If the index falls more than 20%, the fund will begin participating in losses once again, maintaining a roughly 15-percentage-point advantage over the S&P 500. = Papa Bear (about 40k cts)
To cover the remaining cost of the put purchase, the managers sell out-of-the-money call options, which caps the strategy’s upside. The call strike price moves dynamically with market conditions, averaging between 3.5% and 5.5% above the index value, historically.
JPMorgan Hedged Equity Funds 2 (mama bear about 9k cts) and 3 (baby bear about 6k cts)follow the same portfolio construction process as Hedged Equity, but the three series reset their three-month options overlay on different months.
The main idea from our POV is that these options are a permanent feature or structure in the SPX complex. Often, they don’t matter much (when we are somewhere between main strikes and out in time). Ther are times (like last August) that we bottom (or other times we top out or Pin on or near the strike). Sept. 2024, we closed almost on the 5750 short call strike (which seemed impossible when we were 400 points away a few weeks before). I’ll do a piece (maybe if you bug me, I mean request it in the future in more detail).
The part that I want to talk about now is the day of the restrike - the last day of the month. The long put was DITM (5710) so that wasn’t very relevant today. What is always relevant is the IMHO is the “delta offset” on the day of the restrike (usually around 2-2:30 PM). There are some quants who can explain to you exactly why it DOES NOT MATTER (delta offsetting etc.). Fine. Anecdotally I NOTICE when those offsetting delta come in we stabilize and often run (depending on the rest of the surface).
The Delta offset works like this; JPM buys DITM calls 0DTE (about half of what they sell) to offset the negative deltas they are selling. They are selling calls 3 months out (July EOM and buying pds - that’s a lot of negative delta.
Here is a screenshot of the 0DTE delta buy (at 2:00.16 ish)
At the same time they struck the July collar
Then at the close they ‘roll it’ (if needed) so that they fulfill their mandate (Long put 5% OTM / Short put 20% otm) and sell a call to pay for it. It is the price of the debit spread that determines the call they sell, not how far otm the call is.
Roll after the close:
They rolled up the put debit spread to the 5% otm strike etc.
JPM Collar Strike and Index Effect
The delta offset (buying 0DTE calls) in the JPM collar restrike could have a positive or stabilizing effect on the index despite also selling delta for 3 months out due to several factors:
When JPM buys the 0DTE calls as part of their collar restrike, this creates immediate delta hedging pressure from market makers who sell these calls. These market makers must buy the underlying index (or futures) to remain delta neutral, creating upward pressure on the market in the short term.
This immediate delta hedging tends to override the longer-term pressure from the 3-month delta selling for several reasons:
The 0DTE calls create concentrated, immediate hedging demand
The 3-month delta selling produces more gradual and dispersed hedging effects
Market makers typically prioritize hedging short-term, high-gamma positions
This can create a temporary "stabilizing effect" as the hedging flows support the market near the restrike date, even though the longer-term positioning remains more cautious.
Longer Answer:
Step 1: Understanding the JPMorgan Collar Strategy per the Prospectus
The JPMorgan Hedged Equity Fund employs a collar strategy to manage risk on a portfolio of S&P 500 stocks. According to the fund’s prospectus (e.g., JHEQX, as filed with the SEC), the strategy involves:
Long Equity Portfolio: Holding a basket of S&P 500 stocks, which inherently has positive delta (price increases with the index).
Selling Call Options: Typically out-of-the-money (OTM) calls with a tenor of around 3 months, which introduces negative delta and generates premium income.
Buying Put Options: Typically OTM puts with a 3-month expiration, providing downside protection and adding negative delta.
The prospectus states that the fund “seeks to provide capital appreciation through participation in the broad equity markets while hedging overall market exposure.” The collar is re-struck (adjusted) quarterly, aligning the strike prices of the options with current market levels to maintain a balance between upside potential and downside protection. The fund aims to maintain a “delta-neutral” or “low net market exposure” stance, meaning the combined delta of the portfolio (stocks plus options) is kept close to zero or slightly positive.
The user’s query highlights two specific actions during this re-strike:
Buying 0DTE calls.
Selling delta for 3 months out.
Let’s define these terms based on the prospectus and market context:
0DTE Calls: Options expiring on the same day they are traded (zero days to expiration). These are not explicitly detailed as a standalone purchase in the prospectus but are often used in hedging strategies to fine-tune delta exposure during transitions (e.g., rolling options).
Selling Delta for 3 Months Out: Likely refers to selling new 3-month call options as part of the collar re-strike, which reduces delta exposure over the next quarter.
The question is: Why does this combination—buying 0DTE calls (positive delta) while selling longer-term delta—result in a positive or stabilizing effect on the S&P 500 index today?
Step 2: Mechanics of the Collar Re-Strike
At the end of each quarter, the existing options (puts and calls) expire or are closed out, and new 3-month options are established. Here’s what happens:
Closing the Old Collar:
The previous 3-month calls and puts, now at or near expiration, are settled or unwound.
If the index has moved significantly, the delta of these expiring options may no longer align with the portfolio’s needs, creating a temporary delta imbalance.
Establishing the New Collar:
Sell New 3-Month Calls: These are OTM calls with negative delta, reducing the portfolio’s upside exposure.
Buy New 3-Month Puts: These are OTM puts with negative delta, adding downside protection.
The prospectus notes that these options are “typically set at strike prices that limit both upside and downside,” aiming for a net delta close to neutral.
Transition Period:
On the re-strike day (often the last trading day of the quarter), the fund must manage the delta shift between closing old positions and opening new ones. This is where 0DTE options may come into play.
Step 3: Role of Buying 0DTE Calls
The prospectus doesn’t explicitly state that the fund buys 0DTE calls as a core strategy, but it does mention flexibility in using “options on equity indices” to “hedge equity market exposure” and “adjust the portfolio’s risk profile.” In practice, large funds like JPMorgan’s often use short-dated options (e.g., 0DTE) during re-strike to smooth delta transitions.
When the fund buys 0DTE calls:
Positive Delta: Call options have a delta between 0 and 1. For OTM or at-the-money (ATM) 0DTE calls, delta might range from 0.2 to 0.5 (depending on moneyness), adding positive delta to the portfolio.
High Gamma: 0DTE options have extremely high gamma because their delta changes rapidly as the underlying index moves. Gamma peaks as expiration approaches, especially for options near the money.
Immediate Hedging Need: To maintain delta neutrality, the fund’s traders (or their counterparties) must hedge this position. Since 0DTE calls expire today, any hedging must occur immediately.
Hedging Impact:
If the index rises, the delta of the 0DTE calls increases (due to high gamma), requiring the fund or its dealers to buy S&P 500 futures or stocks to offset the growing positive delta.
This buying activity exerts upward pressure on the index, potentially stabilizing it (e.g., preventing a sharp drop) or pushing it higher.
For example:
Suppose JPMorgan buys 0DTE calls with a notional value tied to 10,000 S&P 500 index points, and the initial delta is 0.4. That’s a delta exposure of 4,000 index points.
If the index rises 1% (e.g., 50 points on a 5,000 level), high gamma might increase the delta to 0.6, adding 2,000 more delta (total 6,000). To hedge, they buy 2,000 units of the underlying, supporting the index.
Step 4: Selling Delta for 3 Months Out
When re-striking the collar, the fund sells new 3-month call options:
Negative Delta: OTM calls might have a delta of -0.2 to -0.4, reducing the portfolio’s positive delta from the stock holdings.
Lower Gamma: With 3 months to expiration, these options have much lower gamma, meaning their delta adjusts slowly to index movements.
Hedging Impact: To hedge the negative delta, the fund or dealers might sell the underlying, but this selling is:
Gradual: Lower gamma means less urgency in adjusting hedges.
Spread Over Time: The 3-month horizon dilutes the immediate market impact.
For example:
Selling 3-month calls with a delta of -0.3 on the same notional value (10,000 points) adds -3,000 delta. Hedging might involve selling 3,000 units of the underlying, but this can be paced over days or weeks, not all today.
Step 5: Net Effect on the Index Today
Here’s why the combination has a positive or stabilizing effect today:
Short-Term Dominance of 0DTE Calls:
Buying 0DTE calls adds immediate positive delta and high gamma.
Hedging this position requires buying the underlying today, especially if the index moves up, creating upward pressure.
The high gamma amplifies this effect: a rising index triggers more buying, reinforcing stability or gains.
Muted Impact of 3-Month Delta Selling:
Selling 3-month calls adds negative delta, but the lower gamma and longer timeframe mean hedging (selling the underlying) is less urgent and more gradual.
This selling doesn’t fully offset the immediate buying from the 0DTE calls on the re-strike day.
Market Dynamics:
The prospectus emphasizes that the fund’s trades are executed to “minimize market impact,” but the sheer size of JPMorgan’s positions (billions in notional exposure) means dealers and market makers adjust their books in response.
On re-strike day, the net buying pressure from 0DTE call hedging can outweigh the selling pressure from the new collar, especially in a rising or volatile market.
Step 6: Evidence from the Prospectus
The JHEQX prospectus (e.g., as of the latest filing) notes:
“The Fund may use options expiring on different dates to manage its exposure during transitions.”
“The Adviser seeks to maintain a low net exposure to equity markets through dynamic hedging.”
Positions are adjusted “in response to market conditions on reset dates.”
While 0DTE calls aren’t named explicitly, their use aligns with the fund’s goal of managing short-term delta fluctuations during the quarterly reset. The positive or stabilizing effect arises because the immediate buying (from 0DTE hedging) outpaces the gradual selling (from 3-month options) on the re-strike day.
Conclusion
The delta offset from buying 0DTE calls in the JPMorgan collar re-strike has a positive or stabilizing effect on the S&P 500 index today because:
Immediate Positive Delta: 0DTE calls add positive delta with high gamma, requiring dealers to buy the underlying to hedge, supporting the index price.
Delayed Negative Delta: Selling delta via 3-month calls has a slower, less immediate impact due to lower gamma and a longer horizon.
Net Buying Pressure: On re-strike day, the short-term buying outweighs the longer-term selling, stabilizing or lifting the index.
This aligns with the fund’s prospectus, which prioritizes delta neutrality and flexibility in hedging, without contradicting the mechanics of options trading.
And there we have it!
Next JPM is the May EOM baby bear, but fret not - QYLD which is basically a QQQ cover call fund (more on that in May) that sells the AM call for the next Mopex ATM and BUYS IT back on the THURSDAY before the Friday AM expiry and SELLS atm NDX calls on the next day Friday. We’ll be talking about it in a few weeks.
Good Night
Great write up on this subject! Thank you so much for your time.
IS this where i start a chat