Why options market activity is a growing concern

Increasing signs of a worrisome trend in same day expiring options

Today, I have a very special surprise. ⭐️

My partner, Markets & Mayhem, has written this article as a guest post! I very much enjoyed reading this article about the recent options market activity and I hope you appreciate it too. 🙏

---

Happy Saturday! I’m thrilled to have the opportunity to share some of my thoughts on what’s going on in the options market with you all. Thank you, Ayesha.

What a start to the year it has been for the market! Lots of choppy trading, and finally some upward momentum. But what has me concerned is that one of the leading drivers of that upward momentum seems to be outsized activity in the options market. Particularly within the S&P 500 index options, which is the largest options market in the world.

The tail wagging the dog

Seen below we have a chart that illustrates that 50% of S&P 500 index options being traded expire within 6.4 hours or less. An extraordinary and never before seen phenomenon at this scale which is driving intraday price action.

Traders of these options, a mix of institution as well as some retail, are causing what I refer to as a “delta squeeze” impact. In essence, they are buying near to the money, same day options in such size that the volume exceeds open interest. That creates the potential for increased dealer hedging flows, as dealers often want to stay “delta neutral” or essentially positioned flat from the perspective of market exposure.

What happens when there’s this surge of inflows into calls at close to the money strikes is that these same dealers (or market makers as they’re often called) hedge aggressively, and often automatically as a lot of this activity is driven by near real-time algorithms. When they hedge they are often buying E-mini S&P 500 futures to flatten their exposure.

Subscribe and read on to learn about how the delta squeeze scenario takes place, what is driving it and why this could be a concern for the markets. ⤵️