Let there be gamma

It’s been over a MONTH since we last wrote about one of the more fashionable market bugbears, zero days to expiry options. Luckily, Bank of America has published a report to let us scratch our itch.

First of all, so-called 0DTEs keep gobbling up more of the US equity index options market, which isn’t going to reassure people who worry about the potential for “toxic combinatorial chemistry”.

The notional trading volumes have averaged $760bn a day so far in 2024, up 36 per cent from 2023’s $560bn average, with several record-breaking days occurring this year.

That’s partly just because of the S&P 500’s rally — the notional value of each contract goes up as the value of the underlying index climbs — but 0DTEs also keep taking market share from other S&P 500 index options.

Seven of the most extreme days on record have happened in 2024, according to Bank of America — at their peak, accounting for 61 per cent of all equity index options trading volumes:

This isn’t going to reassure those who think 0DTEs might be artificially suppressing US stock market volatility, but, for what it’s worth, Bank of America’s equity derivatives team point out that the 0DTE complex remains “well-balanced”, with a ratio of puts to calls consistently holding around 1.

However, they do strike a note of caution, because sellside analysts like to hedge their positions just as much as journalists.

Altogether the SPX 0DTE complex has remained well balanced — not overrun by sellers or buyers — as it has grown and even across different vol regimes. Hence, for the time being the 0DTE ecosystem does not appear to be sowing the seeds for the next Feb-18 style “Volmageddon” as some have suggested.

However, we are cognizant that while balanced now, the space could see major positioning imbalances develop either structurally over time (due to the mass adoption of one-sided 0DTE strategies) or suddenly intraday (as end-users “weaponize” the product to chase a large up/down move). The latter could be amplified by fickle liquidity provision in 0DTEs — a hallmark of today’s fragile, electronic markets — potentially leaving end-users stuck in 0DTE positions & hurting market makers who rely on other options to manage 0DTE risk.

Regarding the weaponisation point, it should probably be noted that 0DTEs were only introduced in 2022, after the whole 2021 meme stonk phenomenon . . . 

Further reading:
— The Cboe wants to ‘debunk’ some 0DTE myths (FTAV)