0DTE OPTIONS, THE (LITTLE) USEFULNESS OF VIX1D, AND VOLMAGEDDON: LET’S CLARIFY
In recent months we have only talked about this, and looking at the volumes, the success of the Options on the S&P500 Index with expiries available on every day of the week is undeniable .
But let’s start immediately by framing this product correctly.
These are NOT Options that arise at the opening of trading and expire at the closing, bringing to mind analogies with Binary Options and other junk products, closer to gambling and betting on horses, than to trading.
These are options listed on a regulated market (CBOE) that were listed 4 weeks ago : the difference, compared to the Options with Weekly expiries, is that we now have an Option available that expires on EVERY DAY of the week and not just on Friday .
It was a slow process, which began in 2011 with the introduction of Options with Weekly expiry (Friday), then in the first part of 2016 those with expiry on Wednesday arrived and in the second part those with expiry on Monday, and finally in May 2022 those expiring on Tuesday and Thursday, to complete the week.
If I open an SPX Option Chain today I can already trade each of these options that expire every day of the next 4 weeks , offering the trader total flexibility on the choice of expiries to work on. And offering the possibility of working EVERY DAY on Options that are close to expiring, taking advantage of typical dynamics of this phase of their life (Expiration).
But in order to exploit these dynamics, you must first understand them thoroughly, or the risk is that of being sitting at the poker table and not having understood after a few hands, who the chicken is (…when it happens, it is likely that the chicken is you ).
Let’s start by examining what happens on Implied Volatility .
The success of these Options and the volumes recorded on the day of expiration ( 0DTE = Zero Days To Expiration ) led the CBOE to launch a Volatility Index that considers the premiums of Options on SPX that expire today and tomorrow: VIX1D .
And here is the first “trap”: not having fully understood how this Index is calculated , and starting to use it to make comparisons with the VIX or the VIX9D … which led traders (even experts) to incorrect reasoning, on which they then built strategies (and you can already imagine how it ended).
I have extracted some slides from the next Trading Camp starting at the beginning of July, given that this operation is precisely one of those we will be working on in these days…
This is the comparison between the VIX1D (in blue) and VIX (in orange) indices, while below I have graphed the difference in points between the two: apparently, it seems like a confirmation of the Contango that we find on all VIX derivatives when we analyze the expiries following. But the most obvious thing are these spikes that VIX1D seems to record with a certain systematicity, catalyzing the most absurd theories.
One of these is that the VIX no longer provides a correct representation of the Volatility of the S&P500, given that Options volumes have moved to shorter maturities, and these are those that reflect the “true” volatility of the market.
And to demonstrate this thesis, they point out that in 2022 the VIX has never reached panic selling levels , as we have observed other times in the past.
But has it ever crossed your mind that if the VIX didn’t reach these levels, maybe it wasn’t panic selling?
If you really want to shorten the observation period, then you could consider the VIX9D index , which has existed for some time now, and which I report below together with the traditional VIX . As you can see, there has been no “revolution”: by moving the calculation to the Options with the closest expiry, I obtain an index with more extreme readings (less “averaged”), both upwards and downwards.
In the lower panel, you always find the differential between the two indices: above zero it means that the VIX is higher than the VIX9D, so we better take measures on certain statements such as that “volatility on the closest maturities is higher” (when it was enough observe the difference between the two indices to realize that things are not like this).
Why use VIX9D instead of VIX1D?
Because the calculation of the VIX1D index does not have much to do with the volatility of the Options you are going to trade: not only is it USELESS but it is also dangerous because it can mislead many traders.
It’s a “strong” statement, but by now you know that I like to let the numbers speak, so…
These are two ATM Put Options on SPX whose Implied Volatility I tracked during yesterday (these are also a couple of slides that I took from the material of the next Trading Camp , but we are talking about more than a thousand slides , so yes It’s just a little taste.)
At the opening (3.30 pm) the Volatility of the 0DTE is 19.9% while that of the 1DTE is 16.6%.
Over the course of the day, if you take a look at the subsequent readings, you will notice that the 0DTE drops from 19.9% to 15.6% while the 1DTE remains stable around 16%.
Apparently, nothing unusual… except that the VIX1D Index (which you find at the top right in each white box) went from 9.12 to 11.29 . So, while the Implied Volatility of the Option I was actually trading was falling by 3.3 points, that of the VIX1D Index was showing an increase of over 2 points.
You can get a more precise idea of the intraday trend of the VIX1D Index by looking at the graph below on the right (…rise).
Looking at the one on the left, however, the first thought is that these are “fake” quotes… but this is not the case. This is the dynamic that we observe on a daily basis on the VIX1D Index, and to show it to you better, I have “unpacked” this Daily graph that you see on the left, into a 30 Min graph (below).
Who wouldn’t think of exploiting this very systematic bullish dynamic of Implied Volatility, from the opening to the closing of each day?
…too bad that it is not “real”, and that the Volatility of the Options you will actually trade on will follow a completely different trend (as shown above).
Why does this happen?
It has to do with the choice that the CBOE made for the calculation of this index, which goes beyond the scope of this article: here it is enough for me to have convinced you that the VIX1D index is useless, and that observing it can only lead you to make wrong decisions.
But this is just an example of the superficiality with which we approach markets and “new” tools… and I’m not just talking about retail traders.
A few months ago, Kolanovic ‘s (JP Morgan) statements made the news about a Volmageddon 2.0(Volatility Armageddon — literally, the end of the world caused by volatility) which could be triggered due to the shift in Options volumes to such short maturities. If you’re wondering when the first Volmageddon occurred, it was February 2018.
In summary, Kolanovich states that the underlying hedges that Options sellers would be forced to undertake would amplify the movement of the index, causing a flash crash. But reducing everything to the sale of Options does not come close to the reality of Options trading which is made up of spread positions and strategies that combine options on different strikes and expiries.
The situation is a little more complex than how Kolanovic tells it , and although it is not possible to rule out Flash Crashes (like the ones we have seen several times in the last decade), we would like to reassure everyone listening that the world is not about to end because of the Options ( …even if saying that the world is about to end always raises the ratings ).
But once we have extricated ourselves from these traps, between preachers of the next Armageddon and “gurus” who want to teach you the next infallible strategy on the trend of the moment (the 0DTE), the question is: what really works on these tools?
The answer is always the same: you have to TEST IT.
And I know it’s not what you wanted to hear, but it’s the most serious thing I have to give you.
To do this, we purchased a year of history with 1 minute granularity of the Options on SPX , to be fed to OptionLAB ( …but before you start thinking of being able to do something similar on Excel, I’ll tell you straight away that the folder with all these quotes, once decompressed, weigh 1 Terabyte, and I assure you that if it’s not exactly immediate being able to handle something like that ).
Strategies with 0DTE and 1DTE Options: this is one of the operations on which we will work in the 12th edition of the QTLab Trading Camp starting on July 2nd, and which falls under the umbrella of “ Arbitrages” (this is the title we have given to this edition of the Camp)
If you cannot be present in the room, you will still be able to follow it remotely in Live Streaming, and you will still have the complete recordings at your disposal (a few days after the conclusion of the work — just enough time to divide all the videos and work on the editing).
Before a Trading Camp it is difficult for me to publish previews of the results of some of the operations on which we will work together in these 5 days, but this time I want to make an exception because I realize that I struggle to convey to you in words the potential of some of these strategies who work every day, remaining in position for only one day, therefore…
This is the equity line produced by a strategy with Options on SPX (0DTE) over the last year (since Tuesday and Thursday expiries were also listed).
ONLY ONE YEAR , with a strategy (a bit unusual, in fact…) where we work with 1 Option contract on SPX: if you know what I’m talking about, you can understand the returns of such a strategy, with these rotation frequencies .
This, however, is the summary from the beginning of May to today, of another strategy (with Options on Shares) where we are working with 1 Option contract for each of these 7 Shares — one for each column, of which I have the ticker above is darkened, otherwise I’ll end up telling you everything…
These strategies that work with Stock Options have a characteristic that makes them decidedly interesting: they are Gamma Positive , and for an Options seller like me, a little Gamma Positivity in the portfolio is always welcome.
But this is just the tip of the iceberg, of the dozens of strategies that I will make available to you on Stock Options, SPX Options, Futures and Stocks: take a look at the presentation video and on this 12th page edition of the Trading Camp , and if you want to join the group (or simply purchase the registration under these conditions) then write to us because you still have time.
Happy Trading
Luca Giusti
