Options traders are chasing the stock-market rally with the S&P 500 near record highs

Options traders have continued to chase the rally in U.S. stocks, stuffing dealers’ books with upside risk in need of hedging as the S&P 500 nears all-time highs, according to data from Nomura’s Charlie McElligott.

As a result, dealers’ net delta exposure has risen to $10.8 billion, the highest on record, according to McElligott’s data.

In options trading, delta represents a contract’s sensitivity to movements in the underlying asset or index — in this case, the S&P 500 SPX index.

But when applied to dealers’ exposure, delta represents an approximation of how much might need to be hedged with each tick higher in the index. The higher the delta, the bigger the position in need of hedging, at least in theory.

Dealers typically hedge their short options positions by buying futures, stocks or other options.

“This just shows that [options dealers] have to buy delta to stay hedged the higher this goes … because again, on a net basis, they’re short a substantial amount of upside optionality to clients,” McElligott told MarketWatch in an email.

Trading in calls linked to the S&P 500 index has remained elevated in December. On average, 1.44 million calls tied to the index are changing hands per session, according to data from Cboe Global Markets, part of a broader surge in options trading since this fall.

For puts and calls taken together, average volume in December has surpassed 3.3 million contracts. That is approaching the monthly record from October, when nearly 3.5 million contracts tied to the index changed hands on Cboe Global Markets’ platforms.

Earlier, the S&P 500 traded within striking distance of its record high, before stocks sold off heading into Wednesday’s close. The index was down 1.1%, at 4,720, during the final hour of trading.