Market Volatility Sparks Concerns Amid 0DTE Dominance

Market Volatility Sparks Concerns Amid 0DTE Dominance 

This week, the markets have been heavily influenced by 0DTE options, creating a sense of stability, at least until yesterday afternoon, as reported by various sources.

The surge in trading activity drove markets to highs, but suddenly, around 2 PM to 2:30 PM, things took a turn, leading to a sharp decline that persisted into the late afternoon.

There's a significant amount of leverage in play in the equities market, resulting in remarkably low volatility and tight trading ranges. Factors such as call overwriting, volatility/put selling, and leveraged products like NVDA ETFs are contributing to this trend.

The sudden market movements have raised concerns about potential violent reversals, as short volatility positions may need to be covered, while long volatility positions may need to be established.

Goldman Sachs trader Brian Garrett highlighted a noteworthy technical indicator: a significant decrease in dealer 'long gamma' positions over the past few sessions. This rapid reduction indicates a shift in sentiment among dealers, which could impact market volatility.

Garrett also pointed out a critical threshold where index dealer positions flip to short during a downturn, coinciding with a key level for short-term momentum among CTAs.

Despite discussions about the volatility market showing signs of unease, the pricing of certain options has only slightly deviated from historic lows.

While some may hope for a swift return to record highs, there are concerns that the market's reliance on short volatility could lead to further instability, similar to a forest fire in dry tinder—ready to ignite at any moment.