Wednesday's 2% reversal in the S&P 500 could have been sparked by a massive options trade, according to Wells Fargo.
The firm said the options trade was worth $31 million and is a bet that stocks will rally into year-end.
Despite Wednesday's rally, the bank believes the stock market needs to see more volatility before a bottom is in.
Wednesday's trading session saw a sharp reversal that led to the S&P 500 briefly erasing a near-2% loss, and a massive options trade could have been behind the surge, according to a Wells Fargo note reported by Bloomberg.
In a Wednesday note from Wells Fargo's head of equity strategy, Chris Harvey detailed a bullish options trade worth $31 million that hit the tape right around the same time stocks hit their intraday low and started to move higher.
"The Greeks of the trade are likely what gave a mid-day pop to the S&P 500," Harvey said.
The specific trade included the buying of 20,000 S&P 500 calls expiring in October with a strike price of 4,500 and 14,000 bullish option contracts expiring in March with a strike price of 4,300. Meanwhile, on the other end of the trade, 48,000 call options expiring in January with an exercise price of 4,500 were sold.
The trade is a bet that the stock market will rally over the next few months — by almost 20% based on current levels. By midday Thursday, the S&P 500 was down 0.4% at 3,768.31.
But some traders are unsure if the option trade was the real catalyst that led to a reversal in the stock market on Wednesday. Chris Murphy of Susquehanna International Group pointed out that the rebound occurred right around the same time the US dollar moved lower and the Federal Reserve Bank of Atlanta's GDPNow index saw an upward revision.
"The USD pulling back off highs was the main catalyst for the S&P rebound, plus the Atlanta GDP upgrade. The delta component of that options trade was not huge. It did not have a big impact on the S&P 500 rally," Murphy told Bloomberg.
While there's debate around the idea that Wednesday's massive option trade helped spark the reversal in the stock market, there seems to be growing consensus that a bottom in the stock market remains elusive.
According to Harvey, "markets will need to experience more stress" before the Federal Reserve pivots its hawkish monetary policy and a stock market bottom is reached. He is looking for the VIX to surge above 40 to get more comfortable with the idea that a Fed pivot and stock market bottom is imminent.
The VIX was just below 30 on Thursday, down from last week's high of about 35.
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