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Here Is The “Catalyst” For The Market’s Inexplicable Surge: A $17 Billion Trade Gone Wrong

zerohedge.com / by Tyler Durden / Feb 15, 2017 8:35 PM

We have noted in the last few days the divergences between US equity and volatility markets and chatter of a major fund needing to liquidate positions. After today’s price action (and more color from trading desks) we are starting to see the ‘fingerprints’ of what appears to be a multi-billion dollar forced short cover, reportedly by Catalyst Funds’ Hedged Futures Strategy Fund (HFXAX), that has almost perfectly correlated with the linear surge in US stocks.

As RBC’s Charlie McElligott, who dug deeper into the details behind this move, notes the melt-up in the S&P is the result of “a purported / murky melt-down over the past week in a large trade by a multi-billion Dollar (open-ended) futures fund which sells vol on S&P.  Without going into specifics, there is market speculation that the entity is effectively short upwards of ~$17B of SPX (deltas to buy) through selling February expiry upside 1×5 (or 1×4) call spreads.”

The trade was going well, until the S&P rose above 2,300. At that point the “convexity seemingly ‘kicked-in’ as witnessed by market participants, the short-gamma ‘take’ since has been nothing short of astonishing.”

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