You’ve heard it again and again. Or at least you have if you frequent these pages. The proliferation of 0DTE options is creating a “reversal flow” dynamic that can exacerbate intraday swings in equities while suppressing close-to-close vol.
That (somewhat vexing) dynamic was on display this month. As a reminder, August now boasts several of the largest 0DTE options sessions both in terms of absolute volume and volume share.
On Wednesday, Nomura’s Charlie McElligott underscored and illustrated the quick points made above.
The figure shows that July was itself a record month for 0DTE options volumes, but it was quickly eclipsed by August, which is on track to stand as the undisputed champion.
Given that, and assuming it’s true that 0DTEs are creating the aforementioned reversal flow, you’d expect that July and August would stand out for divergent intraday price action.
Sure enough, both months are well below average in terms of the share of days during which the S&P moved in the same direction in early trading as it moved later in the session.
The figures (and, obviously, the annotations) are Charlie’s.
Although it’s not all 0DTEs, McElligott emphasized Wednesday that “it continues to look like the recent surge of activity in 0DTE options [is] acting as a ‘mean-reversion’ flow of late, where monetization of winners is helping to drive EOD reversal flows.”
I have been critical of a lot of his takes on 0 DTEs, but this is one I can get behind. I have done a lot of study on these things. I even subscribed to three services for a time to see if there was anything to this. I have a python program that I use to calculate SPX gamma everyday with data from CBOE. I don’t use gamma as a regular part of my trading, but I do like to know what it is.I never had any intention of trading these.
My experience tells me that there are no humans trading these profitably. No human could trade these daily without having a nervous breakdown within a month. The volatility is too extreme. Plus, if anyone was actually good enough to trade these, they would be trading regular monthly options. Profitable but with much less stress.
The issue that I see using gamma as a trading system is that you have to remember that actual people are long or short these options. And you have absolutely no idea what they are going to do. When are they going to take profits? when are they going to “double down”? It is important to read up on the assumptions that go into these gamma models. I mainly use the gamma number as an estimate of how much volatility to expect and that the market tends to struggle when in negative gamma. Is it better than VIX? I don’t know.