FXT Investments Highly Wait-and-See Bank of America Refutes Goldman Sachs

Goldman Sachs blamed an increase in zero-day options (0DTE) for the S & P 500 sell-off on the afternoon of August 15, but Bank of America called that logic "largely misguided". At the heart of the disagreement was the exact role played by put derivatives, which had a strike price of 4,440, close to the trading price.

In Goldman's view, rising client demand for these contracts forced market makers on the other side of the trade to suddenly hedge their risk exposure, ultimately causing the share price to fall sharply in about 20 minutes.

While trades in these puts add up to nearly 100,000 contracts during the day, they are far from one-way bets. Strategists, including Matthew Welty, who broke down trading flows into buy and sell orders, found that clients were net sellers of only 1,000 contracts.

In theory, this position amounts to a bullish bet that would require market makers to snap up stocks for the purpose of balancing their books, rather than selling them, as Goldman has suggested. "High-frequency position data from exchanges suggest this is more of a good thing," Mr. Welty and his colleagues wrote in a note on Tuesday.

A Goldman spokesperson did not respond to an email seeking comment on BofA's differing views.

Zero-day options have been in the spotlight again in recent days as their trading volume surged to record levels in August, raising concerns that the fast-growing investment vehicle could be one of the reasons why the S & P 500 index recorded its biggest monthly decline in 2023.

The debate over the impact of zero-day options contracts on the market continues, with analysts such as JPMorgan quantitative analyst Marko Kolanovic warning that their popularity could lead to a repeat of events like 2018's Volmageddon, while others see it as just another example of doomsayers stoking fear with the latest market evolution.

For several months,FXTThe team has long argued that concerns about zero-day options are overstated.

In its latest report, Bank of America attributed last week's pullback to other factors, such as selling by rule-abiding traders and renewed pressure from rising bond yields. But while they disagreed with Goldman's views on market dynamics on August 15, they also said the recent surge in options trading and falling stock prices may not be coincidental.

"Record daily volumes disproportionately (and increasingly) favour puts over calls, a phenomenon that predates the market sell-off that began in early August," BofA strategists wrote, adding: "We are not saying that zero-day options do not exacerbate intraday vulnerabilities, but the likely impact of zero-day options last week has clearly been greatly exaggerated."