One Large Option Trade Triggers Market Meltup-Susquehanna’s Estimated Dollar Will Decline

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  • GDPNow’s upgrade triggered the S&P 500’s midday increase

The most recent instance of a chaotic market defies common sense.

According to Wells Fargo & Co., the S&P 500’s increase on Wednesday may have resulted from one huge options transaction.

According to Chris Harvey, the company’s head of equity strategy, the deal, which entailed purchasing and selling call options linked to the index at the cost of about $31 million, likely contributed to a rebound that saw the benchmark gauge reverse a 1.8% fall.

Although frequently challenged, theories that derivatives trading may have caused movement in an underlying asset have been prevalent in this year’s wild market swings. The consensus is that a market maker on the opposing side of an options transaction will need to purchase or sell equities to balance positions.

The dealer may have an excessive effect on the market depending on exposure, a phenomenon described by the Greek word delta. Harvey felt that the effect this time was favorable.

In a message to clients, Harvey stated that “the Greeks of the transaction are probably what gave a mid-day jump to the S&P 500.”

The S&P 500 recovers its intraday loss. Wednesday encourages the look for catalysts.

The trade consisted of purchasing 14,000 bullish contracts expiring in March at a strike price of 4,300 and 20,000 S&P 500 calls expiring in October with a strike price of 4,500 while simultaneously selling 48,000 calls maturing in January with an exercise price of 4,500 — essentially betting that stocks would rise in the ensuing months.

Gareth Ryan, managing director at IUR Capital, noted that the dealers who took the other position “had a great amount of risk to counterbalance” and that they had the option of purchasing equities futures to maintain the balance of their books. It undoubtedly may have affected the cash market. This is one of the biggest deals I have seen in terms of magnitude.

Not everyone believes that the transaction is the direct cause of the S&P 500’s rise. Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, observed that the rebound of the S&P 500 occurred at the same time as the dollar declined and the GDPNow index of the Federal Reserve Bank of Atlanta was revised upward.

In addition to the Atlanta GDP boost, Murphy indicated that the key impetus for the S&P comeback was the USD retreating from highs. “That options trade’s delta component wasn’t very large. It had little effect on the S&P 500 rise.

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