MW Why the hidden mechanics behind the market's record run may no longer be helping stocks
By Jamie Chisholm
Frantic option action has supported equities
Options provide traders with a highly-geared play on the market.
The remarkable April rally that saw the S&P 500 register one of its sharpest rebounds on record and finish last week at a new peak has some investors bewildered.
How, they ponder, can the Wall Street benchmark be even higher than it was before the Iran war started while the conflict is only on pause during the largest oil supply disruption in history?
For SpotGamma, a provider of data and analytics for the derivatives market, the answer may be found in the ferocious action seen in stock-linked options of late.
Call options give the buyer the right to buy the underlying asset at a specified price within a certain timeframe. A put option gives the buyer the right to sell the underlying asset at a specified price within a certain timeframe.
In an analysis published late Sunday, the SpotGamma team note that the last two weeks have witnessed a surge in options activity, particularly in out-of-the-money calls being bought, suggesting a plethora of aggressively bullish bets by traders.
"The frenzy of call buying comes from a mix of both genuine optimism, [fear of missing out], and forced hedging," say SpotGamma.
As the chart shows, S&P 500 call option buying has hit a record, driven primarily by a surge in zero-day-to-expiry calls, or 0DTEs. These options last for just one day and thus provide the trader with a risky ultra short-term bet on a stock or index's moves in that session.
Source: SpotGamma
The preponderance of short-term call options can provide extra juice to a stock-market rally because of the dynamic between traders and dealers, SpotGamma explains.
When traders buy S&P 500 call options, the dealers who sell those calls need to buy S&P 500 futures to remain what's called delta neutral. To simplify, being delta neutral means option dealers will shift their holdings of the underlying asset as option prices move in order to maintain a hedged position. They don't want to be exposed to the broader market moves.
"As the market rallies, the value of those calls increases, and dealers must buy additional futures to hedge. This creates a self-reinforcing feedback loop that provides sustained bids to the market," says SpotGamma.
On April 15, for example, SpotGamma says it saw around $13 billion of call-related hedging requirements for the S&P 500 complex - a session that delivered one of the biggest hedging indicators on record.
This dynamic can also occur in single stock options. SpotGamma notes that call option costs for Microsoft $(MSFT)$ and Apple $(AAPL)$ last week were significantly higher relative to puts than is usually the case. "Both names were up 4-5% for the week, indicating elevated demand for upside exposure across the market," they say.
However, the April option expiry $(OPEX)$ that occurred on Friday - in which 90% of the S&P 500 options expiring were calls - means the important support for the market may have been changed in two ways.
"First, OPEX clears long call positions that had driven the market upwards," says SpotGamma. Second, analysis of the current S&P 500's option market complex shows dealers have "neutral to negative" hedging needs. In other words, and to simplify, it may be more likely dealers now have to sell S&P 500 futures.
SpotGamma stresses that while the "OPEX certainly changes the environment, that does not necessarily mean the rally is over."
"However, traders who chased calls into all-time highs should be aware that the same mechanics that pushed markets up can also lead to sudden reversals."
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are lower as benchmark Treasury yields BX:TMUBMUSD10Y rise on the back of higher oil prices (CL.1). The dollar index DXY is up and gold futures (GC00) are trading around $4,805 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7126.06 4.54% 9.52% 4.10% 34.89% Nasdaq Composite 24,468.48 6.84% 13.03% 5.28% 50.24% 10-year Treasury 4.264 -2.90 -8.70 9.20 -15.00 Gold 4813.2 0.98% 9.13% 11.10% 40.12% Oil 87.42 -10.80% -1.65% 52.27% 39.45% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
The U.S. boarded an Iranian vessel in the Gulf of Oman as Washington and Tehran give conflicting accounts of whether peace talks will resume in Islamabad, Pakistan, this week.
Alphabet's $(GOOGL)$ Google is in talks with Marvell Technology $(MRVL)$ to build new AI chips, according to The Information.
QXO $(QXO)$, the acquisitive building products vehicle launched by billionaire Brad Jacobs, is buying insulation company TopBuild $(BLD)$ for $17 billion.
Eli Lilly $(LLY)$ is in advanced talks to acquire privately held Kelonia Therapeutics, the cancer biotech company, for more than $2 billion, according to the Wall Street Journal.
American Airlines $(AAL)$ said late Friday it was "not interested" in a merger with United Airlines $(UAL)$, following recent chatter about a deal.
It may be a big week for the Federal Reserve as putative Chair Kevin Warsh will face a confirmation hearing before the Senate Banking Committee on Tuesday.
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The chart
The cost of oil is rising again and this should put upward pressure on U.S. gas prices. Julian Emanuel, strategist at Evercore ISI, provides the chart as reminder that "the threat to stocks and the economy from elevated oil prices cannot be ignored." In a note published over the weekend, he says: "In past oil price spikes, sustained multi-month elevated levels($93-$98 a barrel WTI and $4+ gasoline) have tanked bothstocks and the economy."
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Ticker Security name NVDA Nvidia TSLA Tesla GME GameStop MSFT Microsoft AMZN Amazon.com AAPL Apple TSM Taiwan Semiconductor Manufacturing AMC AMC Entertainment AMD Advanced Micro Devices PLTR Palantir Technologies
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April 20, 2026 06:27 ET (10:27 GMT)
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