{"id":1135422,"date":"2023-02-05T10:10:33","date_gmt":"2023-02-05T15:10:33","guid":{"rendered":"https:\/\/bugaluu.com\/news\/why-0dte-is-so-important-and-why-the-vix-is-now-meaningless\/1135422\/"},"modified":"2023-02-05T10:10:33","modified_gmt":"2023-02-05T15:10:33","slug":"why-0dte-is-so-important-and-why-the-vix-is-now-meaningless","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/why-0dte-is-so-important-and-why-the-vix-is-now-meaningless\/1135422\/","title":{"rendered":"Why 0DTE Is So Important, And Why The VIX Is Now Meaningless"},"content":{"rendered":"<div class=\"ftpimagefix\" style=\"float:left\"><a target=\"_blank\" href=\"https:\/\/www.zerohedge.com\/markets\/why-0dte-so-important-and-why-vix-now-meaningless\" rel=\"noopener\"><img decoding=\"async\" width=\"100\" data-entity-type=\"file\" data-entity-uuid=\"b8b7ff50-299e-4dd8-9d28-75fef252bcef\" class=\"inline-images image-style-inline-images\" src=\"https:\/\/assets.zerohedge.com\/s3fs-public\/styles\/inline_image_mobile\/public\/inline-images\/Tchir%200DTE%201.jpg?itok=twSDxnHQ\" alt=\"\"><\/a><\/div>\n<p><span class=\"field field--name-title field--type-string field--label-hidden\">Why 0DTE Is So Important, And Why The VIX Is Now Meaningless<\/span><\/p>\n<div class=\"clearfix text-formatted field field--name-body field--type-text-with-summary field--label-hidden field__item\">\n<p><em>By Peter Tchir of Academy Securities<\/em><\/p>\n<p><strong>Why Do I Keep Thinking 0DTE stands for Zero Dark Thirty?<\/strong><\/p>\n<p>There is a lot to talk about this week:<\/p>\n<ul>\n<li>\n<p>How we nailed the inflation story and got the Powell presser more or less right, but got the market reaction completely wrong. <strong>The rally on Thursday caught me completely by surprise <\/strong>(though in hindsight, it shouldn\u2019t have \u2013 which brings in 0DTE). And, to be perfectly honest, who would have thought that with Treasuries down, earnings misses, and less than stellar guidance the previous night from some tech heavyweights stocks might close in the green? They did briefly, before fading into the close.<\/p>\n<\/li>\n<li>\n<p>We published a detailed report on the U.S. debt profile \u2013 <a target=\"_blank\" href=\"https:\/\/academysecurities.com\/wp-content\/uploads\/Fed-and-Treasury-Interest-Just-the-Facts-2.pdf\" rel=\"noopener\">link here <\/a>and the Fed\u2019s holdings of U.S. Treasuries. This was to give people a sense of how long it takes for higher rates to really increase our average cost of debt, and to provide a sense of the losses that Congress should expect from the Fed\u2019s QE holdings. More on background than an actionable item, but <strong>as debt ceiling concerns are likely to mount<\/strong>, it is good to be armed with some facts and figures.<\/p>\n<\/li>\n<li>\n<p>We finished Friday with what was a <a target=\"_blank\" href=\"https:\/\/academysecurities.com\/wp-content\/uploads\/A-Simply-Stunning-Jobs-Report.pdf\" rel=\"noopener\">Stunning Jobs Report<\/a>. <strong>The word \u201cstunning\u201d was carefully chosen <\/strong>(at least by T-Report standards) because it can mean impressive (which the report was), but it can also \u201ccause astonishment or disbelief\u201d which this report managed to do as well! The ADP report was one of the worst reports in some time (though the methodology change could matter), while the NFP report was one of the best in the past year. However, there will always be \u201cbuts\u201d when we have such bizarre ways of calculating this data and incorporating revisions. The Household number, which was strong, was almost entirely due to stacking the revisions into the January number and I\u2019m told by people who dug into it that the real number was more like 80k. I haven\u2019t seen the \u201cresponse\u201d rate, but that has been an issue plaguing many of these surveys. The response rate has been low, leading many to question if there is a \u201cselection bias\u201d that leads to inflated numbers. In any case, the Fed looks at this data and it should sharpen their \u201chawkish tongues\u201d as they get back on the media and speaking circuit.<\/p>\n<\/li>\n<li>\n<p><strong>A Chinese Spy balloon<\/strong>? Please see <a target=\"_blank\" href=\"https:\/\/academysecurities.com\/geopolitical-insights\/sitrep-chinese-surveillance-in-the-u-s\/\" rel=\"noopener\">Friday\u2019s SITREP <\/a>(and update) for thoughts and comments from several members of Academy\u2019s Geopolitical Intelligence Group. Academy continues to see a rift in U.S.\/China relations, but I certainly didn\u2019t have \u201cballoon delays Blinken visit\u201d on my bingo card. We do intend to publish World War v3.1 (the battle over chips) early this week, but there were just too many more pressing issues on which to focus.<\/p>\n<\/li>\n<\/ul>\n<p>With all of that said, this weekend\u2019s T-Report will focus on 0DTE or <em>Zero Day to Expiration options<\/em>. Zero Dark Thirty sounds \u201ccooler\u201d and is military \u201cslang\u201d for half an hour past midnight specifically or a time in the night where operations can be conducted under the cover of darkness \u2013 which again, seems to bring me back to 0DTE.<\/p>\n<p><strong>The Rise of 0DTE <\/strong><em>(first discussed by Zero Hedge last November in &#8220;<a target=\"_blank\" href=\"https:\/\/www.zerohedge.com\/markets\/whats-behind-explosion-0dte-option-trading\" rel=\"noopener\">What&#8217;s Behind The Explosion In 0DTE Option Trading<\/a>&#8220;, and only now is everyone catching up)<\/em><\/p>\n<p>\u201cThe Rise of 0DTE\u201d sounds like a \u201cTerminator\u201d sequel, and in some ways it might well be!<\/p>\n<p>Over the past two years we (as market participants) have been forced to understand some heretofore unknown phenomena in order to navigate markets: Meme stocks, Wall Street Bets, and Weekly Gamma Squeezes, to name a few.<\/p>\n<p>We\u2019ve highlighted the growth of trading in short maturity options for a few months now. It started in the past year and has accelerated. It has gone from a blip on our radar screen, to something that was pinging consistently, and now to something that is capturing our full attention.<\/p>\n<p>Randall Forsyth summed up the current zeitgeist well in \u201c<a target=\"_blank\" href=\"https:\/\/www.barrons.com\/articles\/zero-options-fuel-frenzy-wall-street-casino-meme-stocks-51675445766?mod=Searchresults\" rel=\"noopener\">Zero-Day Options Fuels Latest Frenzy in the Wall Street Casino<\/a>\u201d.<br \/>\nVery short-dated options are much more akin to \u201cgambling\u201d than investing. On Thursday, option volumes were dominated by options expiring on the 2nd (true 0-day options) and those expiring on the 3rd (originally longer-dated options that were set to expire on Friday). Friday\u2019s pattern was similar to the vast majority of the most active options expiring that day.<\/p>\n<p>I admit, I pull up MOSO (on Bloomberg) to follow the most active options during the day. It is a bit like watching a horse race. There is SPY Feb 2 410 in the lead. TSLA Feb 3 190 is running a close second. TSLA Feb 3 190 then takes the lead, but up pops TSLA Feb 3 200 from the back of the field. SPY Feb 2 415 is making a charge, but whoa, what happened here, TSLA Feb 3 200 is now the front runner. However, look at this field. Of the 20 top contenders, only one is a put and only one is longer than Friday maturity (an ARKK Feb 17 Call, presumably because ARKK doesn\u2019t have a shorter dated option).<\/p>\n<p><strong>Thursday saw the heaviest call option trading ever recorded <\/strong><em>(see &#8220;<a target=\"_blank\" href=\"https:\/\/www.zerohedge.com\/markets\/today-was-largest-option-volume-session-all-time\" rel=\"noopener\">Today Was The Largest Option Volume Session Of All Time&#8221;<\/a>)!<\/em> The relatively tiny premiums involved in 0DTE allowed massive notional lots be traded. <strong>It is the ultimate way to leverage your \u201cportfolio\u201d.<\/strong><\/p>\n<\/p>\n<p>Put option volumes also ticked up and were relatively balanced with calls on Friday \u2013 which may be why the \u201crip\u201d into the European close faded throughout most of the day. This could be an important feature of 0DTE options trading that differs from the \u201cmeme stock\u201d crowd (which tends to be a \u201clong only\u201d trade).<\/p>\n<p><a target=\"_blank\" data-image-external-href=\"\" data-image-href=\"\/s3\/files\/inline-images\/put%20option%20volume.jpg?itok=d_C9T8Id\" data-link-option=\"0\" href=\"https:\/\/cms.zerohedge.com\/s3\/files\/inline-images\/put%20option%20volume.jpg?itok=d_C9T8Id\" rel=\"noopener\"><\/a><\/p>\n<h3><strong>Forget VIX<\/strong><\/h3>\n<p>The VIX calculations use S&amp;P 500 option contracts with more than 23 days and less than 37 days left to maturity. <strong>So, none of the 0DTE options trading impacts VIX.<\/strong><\/p>\n<p><strong>You can stare at VIX all you want, but you are unlikely to get much useful information<\/strong>. Speculators, vol sellers, covered call sellers, and hedges have all moved their money from the more expensive options (included in the VIX options) to less expensive options. Some option purists will scream bloody murder that the daily option implied volatility is way more expensive than it is in the longer-dated options, but they are being too smart for their own good as this is about leveraged dollars, not trading implied versus realized volatility.<\/p>\n<p>It may still be valid to look to VIX for a signal, but if those options that go into it are not the \u201ctrading vehicle of choice\u201d then how should we expect a timely \u201cearly warning\u201d signal? I don\u2019t think that we can. VIX has been drifting lower and lower on my daily \u201cmarket checklist\u201d and risks dropping off of the screen entirely. <strong>I get far more information pulling up the MOSO screen compared to knowing where VIX is.<\/strong><\/p>\n<p>Ironically, VIX 0DTE calls were being bought on Friday during certain parts of the day (so there is still correlation), but I think that it will be a coincidental indicator at best and more likely a lagging indicator for any larger moves.<\/p>\n<h3><strong>Why It Matters<\/strong><\/h3>\n<p>So far, I\u2019ve done little to explain why I think that it is so important. When we used to write about the \u201cGamma Squeeze\u201d we focused on stocks and ETFs where early in the week you would see weekly option volumes tick up. You\u2019d get large activity in a strike price that seemed unreachable (certainly in a week). Then you would see buying activity in the stock and options across the board. That would start driving the price higher causing more buying until (lo and behold) that previously \u201cunreachable\u201d strike is now in the money.<\/p>\n<p>The 0DTE options trading has some advantages:<\/p>\n<ul>\n<li>It is less reliant on single stocks, which I think lets more people participate in the game.<\/li>\n<li>The low dollar price of these options lets even smaller players control more notional.<\/li>\n<li>You can do it every day! Literally every day is set up to try to gap things higher (or lower). I think lower is also a feature more likely to appear in 0DTE trading than even in the \u201ctraditional\u201d gamma squeezes.<\/li>\n<\/ul>\n<p>But I still haven\u2019t explained \u201cwhy it matters\u201d, so let\u2019s try to do that here.<\/p>\n<p>I will use SPY (S&amp;P 500 ETF) because that seems to be a fan favorite in the 0DTE space.<\/p>\n<p>Let\u2019s say SPY opens at $412 on Monday (it closed $412.35 on Friday).<\/p>\n<p>I buy a SPY 420 Feb 6 Call. It should cost a few cents, let\u2019s say 10 cents. The SPY Feb 6 415C closed Friday at $0.60 and the 420 is a full percentage point more out of the money than the 415.<\/p>\n<p>I could buy that from an existing options holder, from an options market maker (who may delta hedge it), from someone writing a covered call, or from someone selling it \u201cnaked\u201d to get some premium.<\/p>\n<p>The \u201cdelta\u201d or the amount of SPY represented by a 420 call expiring that day when the stock is at 412 is minimal no matter what volatility assumption you use.<\/p>\n<p>So, I\u2019m buying this option as a lottery ticket. Presumably most others are as well. At some point, there will be sellers that didn\u2019t hold the options. Let\u2019s look at their behavior:<\/p>\n<ul>\n<li>\n<strong>Market Maker. <\/strong>They sell the option and buy 2% of the notional of the stock (the \u201cdelta\u201d). That\u2019s not the \u201ccorrect\u201d amount, but close enough. At this stage they sold the option and created a tiny amount of buying interest in the stock.<\/li>\n<li>\n<strong>Covered Call Writer. <\/strong>They sell the option and they\u2019d be okay if SPY gets called away at 420 (they tend to focus more on single names, but let\u2019s simplify for now).<\/li>\n<li>\n<strong>Naked Call Writer. <\/strong>The proverbial \u201cpicking up nickels in front of a steamroller\u201d. They are going to collect some premium income on these \u201ccrazy\u201d trades people are willing to spend money on.<\/li>\n<\/ul>\n<p>Now, lets say we get \u201cgood\u201d news and suddenly SPY is at 416. This will have impacted everyone in the 415 Calls in the same way we will demonstrate on the 420 and that may well be why the news got us to 416 in the first place, but this is getting complex and circular (because it is).<\/p>\n<p>SPY jumps to 416.<\/p>\n<ul>\n<li>\n<strong>Market Maker. <\/strong>Has been buying stock on the way up. Maybe 1% out of the money is a 20% delta, so they had to increase their stock holding from 2% to 20% of the notional (would have added pressure).<\/li>\n<li>\n<strong>Covered Call Writer. <\/strong>Starts wondering if they really wanted to let go of the stock at 420 because things feel so good.<\/li>\n<li>\n<strong>Naked Call Writer. <\/strong>Little nervous here. Do they buy some calls? Buy some stock? Sit on their hands? Definitely a wildcard.<\/li>\n<\/ul>\n<p>This complex interplay of gamma and 0DTE options across a number of strikes and a number of similar stocks\/indices gets SPY to 422.<\/p>\n<ul>\n<li>\n<strong>Market Maker. <\/strong>Would have been buying more and the delta is likely much higher than 50% or they would be buying all the way up and would have to start buying more for every tick higher. This adds real buying pressure.<\/li>\n<li>\n<strong>Covered Call Writer. <\/strong>Do some buy the stock or try to buy back the call because they regret not holding it? It wouldn\u2019t take many people doing this to put further price pressure on the stock because the bulls would be fully in charge of the price action.<\/li>\n<li>\n<strong>Naked Call Writer. <\/strong>PAIN. Many will cover or be forced to cover as not everyone can sit there accepting that selling something for 10 cents might cost them $5 or more (currently costing them $2).<\/li>\n<\/ul>\n<p><strong>Like everything else in trading, this doesn\u2019t work in isolation.<\/strong><\/p>\n<p>Positioning plays a crucial role in helping this sort of strategy work. You don\u2019t need to \u201cshare the idea\u201d because it is so visible that it attracts attention, but sharing the ideas and \u201cprofitability\u201d helps (my social media stream is getting clogged up with \u201cturn $500 into $100,000\u201d with 0DTE). <strong>Thursday was ripe picking for this strategy for many reasons and it worked!<\/strong><\/p>\n<h3><strong>Puts Can Work as Well<\/strong><\/h3>\n<p>This strategy can work (and has been working) in either direction and there were some high put activity days. <strong>0DTE trading tends to amplify moves in \u201cboth directions\u201d.<\/strong><\/p>\n<p>On Friday, it seemed like many got sucked into the \u201cthis only goes up\u201d mantra (which almost worked), but 0DTE is different than meme stocks in that respect.<\/p>\n<h3><strong>Windshield Wipers<\/strong><\/h3>\n<p>I\u2019m thinking of 0DTE as a \u201cwindshield wiper\u201d strategy.<\/p>\n<ul>\n<li>It can push higher and if something cracks, it can drive it a lot higher.<\/li>\n<li>If nothing cracks, then they can push it lower. If something cracks, then they can drive it much lower.<\/li>\n<\/ul>\n<p>This is a game of high leverage where you spend 50 cents knowing that you will lose on a bunch, but you can hit a few $5 tickets and be an overall winner.<\/p>\n<h3><strong>What Stops It?<\/strong><\/h3>\n<p>More prudent options sellers. The weekly gamma squeezes seemed to stop working once market makers decided what realistic vol was. Then they doubled that to be safe, doubled it again to be extra safe, and then doubled it one more time for good measure. Suddenly squeezes didn\u2019t work as well.<\/p>\n<p>We are far from that occurring since I suspect a lot of today\u2019s readers will dismiss the focus on 0DTE as the \u201cravings of a madman\u201d.<\/p>\n<p>It won\u2019t be the first time, but I suspect that within weeks this will be the biggest topic of conversation out there (helped by the fact that we can stop talking about the Fed for a few weeks and the debt ceiling issue is still a bit distant). <strong>It is occupying 90% of my conversations and not just because I bring it up. <\/strong><\/p>\n<p>I do not think that this is an \u201cup\u201d only strategy, so be careful next week. The one lesson (even for those who don\u2019t really believe that 0DTE is important) is that it helps drive stocks higher. That, I think, is not the correct lesson, though it certainly was true on Thursday!<\/p>\n<h3><strong>Bottom Line<\/strong><\/h3>\n<p>For me (and I haven\u2019t been positioning aggressively) it means running smaller risk and covering when it is going against you, or at least waiting longer to add to losing positions as the 0DTE option trading will extenuate moves!<\/p>\n<p>On the bright side, it was fun to think about something other than central bank policy, if only for a few hours!<\/p>\n<\/div>\n<p>      <span class=\"field field--name-uid field--type-entity-reference field--label-hidden\"><a target=\"_blank\" title=\"View user profile.\" href=\"https:\/\/cms.zerohedge.com\/users\/tyler-durden\" lang=\"\" class=\"username\" xml:lang=\"\" rel=\"noopener\">Tyler Durden<\/a><\/span><br \/>\n<span class=\"field field--name-created field--type-created field--label-hidden\">Sun, 02\/05\/2023 &#8211; 15:00<\/span><\/p>\n<p>From:<a href=\"https:\/\/www.zerohedge.com\/markets\/why-0dte-so-important-and-why-vix-now-meaningless\" target=\"_blank\" title=\"Why 0DTE Is So Important, And Why The VIX Is Now Meaningless\" rel=\"noopener\">Zerohedge<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Why 0DTE Is So Important, And Why The VIX Is Now Meaningless By Peter Tchir of Academy Securities Why Do I Keep Thinking 0DTE stands&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1135422","post","type-post","status-publish","format-standard","hentry","category-news","wpcat-1-id"],"_links":{"self":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1135422","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/comments?post=1135422"}],"version-history":[{"count":0,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1135422\/revisions"}],"wp:attachment":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media?parent=1135422"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/categories?post=1135422"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/tags?post=1135422"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}