Short vol strategies have been profitable lately. “Grotesquely” so, in fact.

The colorful description comes from Nomura’s Charlie McElligott, who on Tuesday described a potentially notable shift in institutional customer flows.

On an intraday basis, the equities price action is increasingly hostage to the dynamics associated with very short-dated options. Recently, the 0DTE phenomenon has manifested in an ebb and flow conducive to the suppression of close-to-close vol. That can become self-fulfilling through various second order effects.

In a new note, McElligott said that, in keeping with “impossibly high Sharpes” on short vol strategies, intraday institutional customer flows in 0DTE options show selling of ATM and slightly OTM puts “into morning lows for a credit, to then buy 0DTE calls for ‘free’ / ‘cheap’ convexity on the rally back.”

He elaborated. “On a number of occasions over recent weeks, this institutional ‘sell 0DTE put to fund 0DTE call’ flow has been arresting equities market selloffs early / midday while eventually helping us rally into the close, as the puts bleed and calls then pick up delta as spot rallies on dealer hedge flows.”

(These are your “markets,” ladies and gentlemen. And this is why I continually emphasize that any top-down fundamental equities strategist who fails to keep apprised of these dynamics will find themselves habitually bereft.)

Charlie walked through Tuesday’s version of the trade sketched above, but the important part from a bigger-picture perspective is that, as noted, this behavior represents a shift in the way some end users are leveraging (figuratively and literally) these products.

“Through much of the early history of these short-dated / highly-convex options, 0DTEs [were] primarily same-day event risk hedging tools and / or ‘gamma squeeze’ inducement vehicles,” McElligott said.

The trade mentioned above, by contrast, could (and I emphasize “could”) set the stage for a cascade. “As this practice grows, [it’s] a potential source of ‘accelerant flow’ risk into a selloff,” Charlie wrote. “One day, that -1.0% ‘floor’ via the newly-crowded 0DTE put sellers, will get blown through, and help to create a -3.5% / -5.0% day as we get a long-awaited ‘(short) gamma event.'”