Zero Expiry Options Highlight Where Real Risks Lie

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by Tyler Durden
Monday, Feb 20, 2023 - 06:00 PM

Authored by Simon White, Bloomberg macro strategist,

The rapid rise in 0DTE (zero days to expiry) option trading means that traditional measures of risk such as the VIX are understating the true extent of underlying market instabilities.

Longer-dated implied volatility is relatively low and has remained subdued.

But this should not be taken as an indication that underlying risks in the market are low.

0DTE trading is leading to larger and more frequent intra-day swings, increasing intra-day volatility even as in inter-day volatility falls. The VIX and the VXV and even the 9-day VIX are not representative of the underlying picture.

The chart above shows SPY vol for longer-dated options, and one much closer to expiry. As is clear, the vol implied by ~0DTE options is higher than longer-dated volatility, and a truer gauge of mounting inherent market instabilities.