Good Morning! A wild 0DTE day with swift and decisive activity yesterday, but again a modest loss. The past few weeks have been reminiscent of all of 2022. Rising rates taking down equities. Yesterday I meandered on Twitter a little more and noticed some prayers to vanna.
@jam_croissant popularized the "window of weakness", a period of 2 weeks after opex where vanna and charm have less of an effect. The subsequent weeks then have a bullish bias because of vanna and charm flows on option hedges for the month. Normally this is accurate, however...
The current environment is different. First, there is less hedging than there was even last month. Second, aggregate charm is currently positive. The 4000 strike was most popular for hedging in March and it is ITM, which makes its charm a bearish force unless we rally past it.
Finally, hedging is increasingly being done via 0DTE options. The vanna/charm boost would only be good if there was more option duration. Yes, 0DTE options do provide a little vanna/charm boost within that day, which is why we only drop 10-20 $SPX pts...
instead of the 30-40 we seem to open every day with. If 0DTE flows didn't come in, it would likely result in a gamma cascade to the downside. 3875 is a key hedging strike to look out for on $SPX. #volland
Will 0DTE destroy the market? The overuse of them leave a gaping hole.
Will 0DTE destroy the market? The overuse of them leave a gaping hole.
If a long portfolio is fully hedged via 0DTE, that means overnight moves are unhedged. A limit-down event overnight could cause a margin squeeze in those portfolios creating multiple limit-down events in a row with massive selling even from these levels.
It would be different from volmaggeddon or Black Monday because it isn't the options that are causing the drop, it would be a margin squeeze on the equities themselves. The danger of this so far begins on 17Mar, as there is very little option duration hedging after this opex.
Another difference is I have doubts that the FOMC would come to save equities. They would claim this is a dramatic pricing shift and it is appropriate for the environment we are in.
Don't be like a 0DTE hedger. You need some duration to cover overnights.
Don't be like a 0DTE hedger. You need some duration to cover overnights.
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