Goldman Sachs Blames Zero-Day Options for Fueling S&P 500 Selloff

Look closely at the contours of Tuesday’s tumble in the S&P 500 and fingerprints of a new market force come into focus.

They’re options tied to S&P 500 with a maturity of less than 24 hours. A flurry of trading in the contracts known as zero days to expiration, or 0DTE, was the backdrop to a jarring acceleration of the day’s decline, one in which the equity benchmark slid roughly 0.4% in 20 minutes, according to Goldman Sachs Group Inc.’s managing director Scott Rubner.

According to Rubner, market makers, whose need to keep books balanced often means they must buy or sell stock en masse when options orders cascade in, were forced into action by furious trading in bearish puts with a strike price at 4,440. Those options saw almost 100,000 contracts change hands during the session or $45 billion in notional value.

As their cost spiked to $9 from 70 cents in a short span near the session’s end, it sent market makers on the other side of transactions in a dash for hedges to stay market neutral. In this case, that meant an exodus from equities.

“There is not enough liquidity on the screens to handle market makers delta hedging such a dramatic move over a short 20 minute period,” Rubner, who has studied flow of funds for two decades, wrote in a note Wednesday.

S&P 500 Posted a Sudden Drop on Tuesday Afternoon