Short-dated options trade behind Thursday's U.S. stock market choppiness -Nomura's McElligott

NEW YORK, Feb 23 (Reuters) – An intraday dip in the S&P 500 Index (.SPX) on Thursday was spurred by large trades in short-dated derivatives that piled selling pressure on the market, according to Nomura strategist Charlie McElligott.

Some 26,000 Feb 23 put options on S&P 500 e-minis futures with a strike price corresponding to the 4,000 level were bought early in Thursday’s session, McElligott said in a note.

When a trader buys a put – an options contract that conveys the right to sell a security at a fixed price in the future – options dealers on the other side of the trade have to hedge their own risk by selling stock futures.

In addition, as the market declines the options dealers have to sell increasing amounts of stock futures to remain hedged. Those trades generated some $2 billion in selling pressure and likely contributed to the index’s intraday reversal, McElligot said. Selling pressure could rise to as much as $5 billion if market declines accelerate, he added.

The S&P 500, which rose as much as 0.9% early in the session, lifted by a strong sales forecast from chipmaker Nvidia (NVDA.O), reversed course to fall as much as 0.6% by noon. The index was last up 0.5% at 4,010.22.

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Trading in short-dated options contracts, or 0DTE– zero days to expiry contracts – have garnered attention on Wall Street in recent months, drawing record volumes and boosting worries about their role in aggravating intraday stock price swings.

McElligot said that Thursday’s trade was “obviously institutional in origin,” noting that it was probably the largest 0DTE block seen to date.

Reporting by Saqib Iqbal Ahmed; Editing by Chizu Nomiyama

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