Options Traders Fuel Upside Risk in U.S. Stocks

Options traders are actively seeking opportunities as U.S. stocks continue to surge, resulting in a surge in hedging requirements, according to data from Nomura’s Charlie McElligott.

Dealers’ net delta exposure has reached a record high of $10.8 billion, indicating a significant need for hedging measures, as reported by McElligott.

Delta and Hedging

In options trading, the term “delta” signifies a contract’s sensitivity to movements in the underlying asset or index, such as the S&P 500 SPX index in this case. When discussing dealers’ exposure, delta provides an estimate of the hedging required with each uptick in the index. A higher delta implies a larger position necessitating hedging.

Traditionally, dealers hedge their short options positions by purchasing futures, stocks, or alternative options. However, due to the current market conditions, options dealers face the necessity of buying additional delta to maintain their hedge, particularly as they hold a significant amount of upside risk from client options.

Elevated Trading in S&P 500 Calls

Throughout December, trading activity in calls linked to the S&P 500 index has remained notably high. On average, approximately 1.44 million calls tied to the index are changing hands per session, according to data from Cboe Global Markets. This elevated activity is part of a broader surge in options trading seen since autumn.

When considering both puts and calls, the average volume has surpassed 3.3 million contracts in December. This figure is approaching the monthly record set in October, which saw nearly 3.5 million contracts tied to the index being traded on Cboe Global Markets’ platforms.

Market Update

The S&P 500 recently approached its all-time high before experiencing a sell-off during Wednesday’s close. By the end of trading, the index had declined by 1.1%, reaching 4,720 points.

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