CBOE's 0DTE Gamma Paper | SpotGamma

Summary

In this video, the speaker breaks down the Cboe's latest zero-DTE options report, addressing the implications of zero-DTE options on market volatility. The analysis counters the 'Volmageddon' fears, suggesting that these options are largely used for hedging, not driving market chaos. The speaker emphasizes the importance of delta exposure over gamma, noting that large trades on specific days can lead to market movements. Ultimately, the video suggests that zero-DTE options are more a substitute for other hedging instruments like futures, with minimal long-term impact on market volatility. A deeper dive into delta flows is recommended for better understanding.

Takeaways

• 😀 The CBOE's zero DTE report analyzes the impact of short-duration options, highlighting that large volumes do not necessarily mean increased risk.
• 😀 Despite the high volume of zero DTE options (50% of options exposure), the report concludes that they are primarily used for hedging rather than introducing new risks into the market.
• 😀 Gamma exposure, although sometimes significant, does not directly equate to market volatility. Instead, it’s the Delta exposure that may cause larger price moves during the day.
• 😀 Zero DTE options could serve as a substitute for other hedging tools like futures, which could explain why they are increasingly used but not causing major disruptions in volatility.
• 😀 The lack of observed volatility changes, even with the rise of zero DTE options, suggests these trades are more about managing risk than contributing to market instability.
• 😀 A key observation is that market makers often balance their options exposure by buying and selling the same amount of options, meaning there’s limited net exposure on any given day.
• 😀 The report suggests that large institutional trades, like those flagged by Goldman Sachs, can still have an impact, as seen with the August 15th trade which caused a short-term market decline.
• 😀 Understanding Delta is critical when assessing zero DTE options because large Delta positions, especially in-the-money options, require substantial hedging that can influence the market.
• 😀 The S&P 500 saw a noticeable decline after a large options trade took place, which illustrates how shifts in Delta exposure, not just gamma, can have an impact on short-term market movements.
• 😀 The report would have benefitted from additional information on the timing and types of options trades (e.g., buy to open vs. sell to close), which could shed more light on their exact impact on market dynamics.

Q & A

What is the primary focus of the CBOE's new Zero DTE report?

The primary focus of the report is to analyze the impact of Zero DTE (Days to Expiration) options on market volatility, with a particular emphasis on their role in hedging strategies and the associated risks. The report includes an examination of gamma exposure and its potential influence on market movements.

How does the speaker view the Zero DTE options in relation to the Volmageddon hype from a few months ago?

The speaker suggests a balanced view, acknowledging that while Zero DTE options may contribute to short-term market volatility, they do not pose the kind of systemic risk implied by the Volmageddon hype. They argue that Zero DTE options may largely be used for hedging rather than creating new risk.

What is gamma exposure, and why is it important in this context?

Gamma exposure refers to the sensitivity of an option's delta to changes in the underlying asset's price. It is important because high gamma exposure can lead to significant hedging activity by market makers, potentially influencing the market, especially if large volumes of options are involved in a short period.

What does the speaker think about the data provided in the CBOE report, particularly the market maker positions?

The speaker believes that while the report provides valuable insights into market maker positions and gamma exposure, it lacks important details, such as the breakdown of specific trades or the flow of options throughout the day. They argue that a deeper understanding of Delta exposure and market maker activities would help clarify the impact of Zero DTE options.

How does the speaker interpret the relationship between Zero DTE options and market volatility?

The speaker argues that while Zero DTE options may have an impact on intraday volatility, there is no clear evidence that they are causing long-term changes in overall market volatility. They suggest that Zero DTE options are more likely substituting traditional hedging instruments like futures rather than adding significant new risk to the market.

What key event does the speaker refer to when discussing the market's reaction to Zero DTE options?

The speaker refers to an event on August 15th, which gained attention due to a large options trade flagged by Goldman Sachs. Despite being flagged as a significant event, the speaker suggests that the market's reaction was more likely a result of changes in Delta exposure rather than any inherent risk posed by Zero DTE options.

What is the significance of the Delta exposure in the context of Zero DTE options?

Delta exposure refers to the amount of underlying asset that market makers need to hedge as a result of options positions. The speaker highlights that changes in Delta exposure, especially with in-the-money or at-the-money options, can have a substantial impact on market movements, particularly as market makers adjust their hedging strategies throughout the day.

Why does the speaker believe that Zero DTE options are used as a substitute for other hedging instruments?

The speaker believes that Zero DTE options are used as a substitute for traditional hedging instruments like futures because the overall volatility and market behavior have not changed significantly, even as the popularity of Zero DTE options has increased. This suggests that the primary function of Zero DTE options is to provide a more efficient or convenient means of hedging.

What does the speaker mean by 'mean reversion' in the context of the market's reaction to options flows?

Mean reversion refers to the tendency of the market to return to a stable or average level after a sharp move. The speaker notes that large options flows, particularly toward the end of the trading day, can cause brief market movements, but these tend to reverse as market makers unwind their hedging positions.

What does the speaker hope to see in future CBOE reports regarding Zero DTE options?

The speaker hopes that future CBOE reports will include a more detailed breakdown of Delta exposure and provide insights into the timing and flow of options trades. They believe that understanding when positions are opened and closed would offer a clearer picture of the actual impact of Zero DTE options on the market.