0 DTE in the news

S

status1

Well-known member
I found this news article in the TOS live news it's about the increasing popularity of the 0DTE trading
www.marketwatch.com

A potential stock-market catastrophe in the making: The popularity of these risky option bets has Wall Street on edge

Professional and amateur traders are flocking to risky equity options that some have likened to lottery tickets, dawn by the opportunity to reap massive...
www.marketwatch.com www.marketwatch.com

There was even a small comment from Ernie at 0-DTE which I recognized since he made presentation here recently
 
status1 said:
I found this news article in the TOS live news it's about the increasing popularity of the 0DTE trading
www.marketwatch.com

A potential stock-market catastrophe in the making: The popularity of these risky option bets has Wall Street on edge

Professional and amateur traders are flocking to risky equity options that some have likened to lottery tickets, dawn by the opportunity to reap massive...
www.marketwatch.com www.marketwatch.com

There was even a small comment from Ernie at 0-DTE which I recognized since he made presentation here recently
Click to expand...
Another similar item posted by Zerohedge a few days ago.

ZeroHedge

ZeroHedge - On a long enough timeline, the survival rate for everyone drops to zero
www.zerohedge.com www.zerohedge.com

Lots of discussion about this over in 0DTE oriented facebook group.

The problem I see with 0DTE is that is not just seasoned traders like Tom et al doing it, who know what risk is and how to monitor and manage it; for them it is fine and gets rid of overnight risk. It is the many others (I believe it is the majority) who just start putting the trades on, thinking that a 5 Delta option is riskless. I think that one of the reasons Jim Olsen stopped participating in the Facebook group regarding 0DTE, is that he kept getting criticized (attacked) by those who got bit when they naively thought they would get instant perpetual success but ended up with a blown up account. As Dan Sheridan always says, it is a craft. It takes time.
 
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I think the concern that is being expressed in all of these articles that are coming out, is that with a large move, everyone will rush to hedge. That is, for example Buy Puts. OK, so the counterparty needs to offload the risk of selling that Put. likely by selling futures contracts. That would accelerate the selling in a down market. Or a more sophisticated retail trader might sell the futures directly to offset a larger position.

This is where it breaks down for me: it doesn't matter if I'm in a 0 DTE or 4 DTE position, or however short-dated my trade is, I *will* be looking at an adjustment. Probably selling futures if it looks terrible and ugly. Does anyone think that traders aren't doing this already? If a support level breaks, that Bid in the futures gets wiped out while everyone jumps into short positions.

This is a speculation on my part: I think the original concern expressed by the Investment Bank(?) was about all of the net new traders rushing over to 0 DTE trades in Options. In search of riches, or whatever, probably coming over from trading Crypto or meme stonks. Who knows....

I attended a webinar from the CBOE in which they happily stated that their daily expirations were doing so well. Something like 44% of all SPX volume was now being done in the 0 DTE expiry. That same was quoted in the article. Great! There's a market demand, and they're meeting the need.

My hope is that this dies down and goes away. I'd hate to see some regulation put in place to somehow protect all of us from ourselves or something that will tilt this or other short-dated options towards market makers and Wall Street Investment Banks.
 
Don Kaufman in his Friday evening TheoTrade video (available on YouTube) did a whole segment on the risks of 0-DTE trades. He described the market maker hedging process and how that has the potential to trigger a gamma squeeze up or down. He pointed out the outsized volume levels in the SPX and SPY options on expiration days. He also mentioned the "Volmageddon" comparison and seemed to imply that such an event could occur as result of 0-DTE trading.
 
While I see a volume increase in 0DTE I am not sure how this will turn into a panic buy or sell in the broad market I think it all depends on what type of trades are being done if you are doing an IC lets say you would have a stop loss or take it off at a certain point where another trader might see an opportunity to enter a trade at a better price

If it was mostly one sided like a short squeeze (AMC,GME) and than they all want to get out at the same time than I can see that scenario but I just don't see that for SPX or SPY since it's more diversified and even with 0 DTE not everyone is betting the same way and even if they do they usually take profits at different levels or they have different stop levels
There are a lot bigger moves caused by what the FED says on any given day than any particular 0 DTE day in my opinion
 
I agree with what you are saying @status1 and while I appreciate Don Kaufman's explanation of MM activity (thanks @Michael for pointing that out, he's very entertaining...😁 ), his example of a long straddle as a representation of a MM's book, it seems counterintuitive. Every move in his example would result in offsetting futures (/ES) trades that would be against the move.

This also suggests that most Retail traders then, in aggregate, are net short. It's hard to imagine that, as you suggest @status1 that there are so many styles and approaches, this would tend to even out. For every Iron Condor or NIC, there's a Butterfly or other Debit strategy.

If instead, MM's are net short in their books, example of a short straddle instead of long, I can see that a market move away from the current hedged-off position will necessitate that they trade futures in the same direction as the move. Buy surely with their sophistication, those MM's have access to other tools, like say, why don't they box-off their net positions every 30 minutes or so to limit their exposure? Also, in a hard market selloff, why don't they jump in and take the other side of everyone rushing to buy Put protection? That would mean they are selling Puts and Buying /ES to hedge. Or just using the negative Delta from all of the Puts they are selling to balance off the greater positive Delta in their books?

I think I'm missing something in the concept of Volmaggedon. If anyone has a clearer picture, I'd love to hear more. Thanks!
 
I watched the Don Kaufman's video explanation but he was explaining more about how the market works in general he was not that specific about 0 DTE and at one point toward the end he said when the market comes down "maybe it's news that kicks it in" which is what I was thinking (FED announcement or some world catastrophe) that has a much bigger impact than 0 DTE
That kind of news event would affect all expirations not just the 0 DTE

It was interesting where he showed how much volume is being traded compared to how much is the open interest which suggests that there is a lot of volume of buying and selling but only a small amount of that position is being held to expiration and actually I believe the open interest number is from the previous date so the OI could have been even smaller on the expiration day

So while there is an increased volume activity in 0 DTE I don't believe this increase by itself would cause any panic buying or selling
Most 0 DTE traders are in it for a certain time during the day until they make some profit or hit a stop loss

As far as the long straddle that was just an explanation of how the MM are hedging any market moves and it would actually do well for the trader in 0 DTE if the market starts to panic one way or the other
 
Michael said:
Don Kaufman in his Friday evening TheoTrade video (available on YouTube) did a whole segment on the risks of 0-DTE trades. PiktID He described the market maker hedging process and how that has the potential to trigger a gamma squeeze up or down. He pointed out the outsized volume levels in the SPX and SPY options on expiration days. He also mentioned the "Volmageddon" comparison and seemed to imply that such an event could occur as result of 0-DTE trading. https://eldfall-chronicles.com/product/2x-gargoyles/
Click to expand...

It's interesting to hear that
 
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