Kolanovic on the surge in short-dated options trading interest, warning of a return of the 2018 ‘Volmageddon’ volatility implosion episode
Says the most recent proliferation of options with zero days to expiry has similar potential to create market turmoil
Kolanovic:
- “While history doesn’t repeat, it often rhymes”
- the selling of these “daily and weekly options is having a similar impact on markets.”
Bloomberg (gated) carry more on Kolanovic’s note. In brief:
options dealers take the other side of trades and must buy and sell stocks to keep a market-neutral stance
Since 0DTE options rarely get in the money, their market impact is now mostly felt through volatility suppression and an intraday buy-the-dip pattern that results from hedging, according to Kolanovic.
However, should the market stage a big move that put these contracts in the money, that would force options dealers to unwind a large amount of their positions, warns the strategist … On a big down day such intraday selling would reach $30 billion, his model shows.
“These flows could particularly impact markets given the current low liquidity environment,”
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“Volmageddon” was a term coined to describe the very rapid and dramatic drop in the value of short-volatility exchange-traded products in early February 2018. The triggers are eerily familiar, a combination of:
- market volatility
- increasing interest rates
- the popularity of short-volatility trades
The turmoil in the derivatives market bled into underlying assets (equities in this case) sending the S&P500 into a 10% tailspin lower.
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SPX, hourly chart – the arrow points to the US CPI data release moves: