Thread by @WizOfOps

Good Morning! Yesterday we got to 3800, and really didn't move from there. There was some back and forth, bit it appeared that 3800 was sort of a pin. There really wasn't anything to pin it there until the 0DTE option dealer positioning shook out.

Anyone following me for a while knows I have a script for following 0DTE flows similar to #volland. I mentioned in my free discord that 3800 was a clear magnet on the 0DTE, even though I was afraid of Chinese contagion. 0DTE has been the subject of debate on its true impact.

I believe it has profound consequences, as that option class has the highest vanna, charm, and gamma levels of any class based on its timing. With 40% of $SPX options traded daily as 0DTE, I believe it is a mix of hedge fund speculation (particularly on the '25' strikes)

and dealer positioning to hedge their vanna and charm exposure on the rest of their book. With so many options traded then you would think IV would come down hard, but that only seems to happen at the end of the day, a testament to how volatile intraday moves have been.

0DTE recently has strongly been bought puts by customers, the standard options positioning. This makes sense for the most part since puts in other expirations have been net sold. Calls have been a mix, with sold calls at 3800 yesterday, but sometimes they are bought.

Does bought puts on 0DTE eliminate crash risk? Unequivocally not. Unchecked they can be a strong charm support, but as the day winds on that impact becomes minimal until standing on those strikes which have recently been 20-30 points OTM. Further 0DTE traders are a scared bunch.

They flip in and out of positions quickly upon market moves that defy their positioning, hence why I had fears of Chinese contagion.

Speaking of which, I don't know exactly why Chinese markets were destroyed yesterday. #wsj claimed it was just fears over Xi's cabinet.

I don't know enough about China to have an informed response, @SofiaHCBBG is who I follow to keep a beat on China, but what is did reveal is the efforts of Biden and Xi to minimize exposure to China and the US respectively has succeeded. A Chinese 6.4% selloff wasn't felt here.

The next couple of divorces will be messy and has already started. Monetary divorce, with China holding so many USTs and the offshore yuan controlled against the dollar, and trade divorce, where right now the US accepts cheap manufacturing from China.

The trade divorce started with the semiconductor ban by the US. Once the two countries are mostly divorced, that's when I think we fight over custody of Taiwan: the emancipated Chinese child from heritage, or the US child from political aspirations.

A funny thing about Taiwan, their "security interests" surround $TSM, the premiere and innovative source for semiconductor sourcing. It is the first time ever that I know of that the resource in the balance isn't completely natural, like oil. It is knowledge.

It would be like Sparta attacking Athens because of their philosophers. Wars are generally fought over natural resources since human knowledge can be shared and attained without taking it. Now the barriers to entry and innovation has been so profound, it like oil in the Gulf War.

Regardless, can be sure Chinese equities have little impact on American equities now. UK bond market proved to have some serious contagion. Noted!