There was a lot of headscratching across Wall Street yesterday when exactly at 10:40am ET S&P futures swooned, with no fundamental news to catalyze the move. And then, 80 minutes later, the selling suddenly stopped and reversed as stocks staged a remarkable recovery with the S&P closing almost unchanged from its opening price.
A bizarre U-turn which left many asking what happened? We now have the answer, and yes – as many speculated, 0DTE was involved, only this time in (record) size.
As Goldman flows guru Scott Rubner writes this morning, there was a major development in 0DTEs, that he needed to flag ahead of his regular weekly commentary:
“Yesterdays was a pretty “boring Thursday” after all of the macro events / data releases, and then…”
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26,000 2/23/23 4000 strike Put options (Bloomberg code IMDWG3P4 4000 Index) on S&P 500 e-mini futures traded yesterday morning (10:40am) in block form. This was well after all of the data releases and macro events for the rest of the day, and when spoos were trading comfortably above 4,000.
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The strike notional was $5.2 Billion, and the premium paid $5.5M. There was $2B worth of delta selling as a result of the hedge, 40% delta.
Knowing well the impact this trade would have on the otherwise illiquid market, this option quickly picked up delta for the rest of the morning – just as buyer intended – and increased dealer selling, in the process sending the price of the put 5x from $5 to $25 in two hours as spoos (shown in blue/inverted below) tumbled from 4030 to session lows just below 3980 by 12pm ET.
And another way to visualize the impact of the trade: linking volume spikes in eminis to the 0DTE put:
Now the interesting part. Equities reversed just after noon and this option quickly lost delta on the fast rally higher, resulting in covering the initial short hedge as we rallied back into the close. As Rubner calculates, “top book liquidity on ES1 futures is $10M. So around lunchtime, dealers sold $2B to later cover $2B by the end of the day.“
To this we will add that it appears that the put buyer didn’t unwind/cover it when it 5x in price, but rather let it bleed out, with sizable trades hitting only after 2pm. This leads us to believe that the purpose of the trade was not to make a quick buck in the 0DTE but the manipulate the entire market first lower, and then higher, allowing the unknown trader to spend $5.5 Million on the most highly levered, liquid, and volatile short-dated option in order to manipulate trillions in market cap.
Going back to Rubner, the Goldman trader notes that “this trade has an institutional footprint, and was too large for “retail traders”. The was likely an institutional investor buying a same day put option, which expired in ~5 hours. This was a size trade.”
As explained in the paragraph we agree, although the reason behind the trade remains unclear.
What is clear is that, as Rubner summarizes, “this is the largest 0DTE block trade that I have ever seen. I need to run the data, but this may be the largest block 0DTE ever (or at least top 5). I track this every single day, and I have to admit that I was shocked watching the short gamma hedging impact on the market.”
Translation: spend $5.5 million in premium, move trillions in risk assets in a direction of your choosing.
As Rubner concludes, the top incoming investor questions following this trade:
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“Do you think institutional investors will begin using 0DTE’s in size to hedge specific daily macro events”? My reply is yes.
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“Can the market handle institutional (not retail) flow in 0DTE’s market impact if this becomes, a thing”? My reply is no.
If Rubner is right, and we believe he is, we are about to see a lot of market chaos and Powell may finally see his wish of a market crash come true…
More in the full note available to pro subscribers.
Tyler Durden
Fri, 02/24/2023 – 14:20
