JP Morgan’s Kolanovic warns of “Volmageddon” 2.0 options risk | Forexlive

Kolanovic on the surge in short-dated options trading interest, warning of a return of the 2018 ‘Volmageddon’ volatility implosion episode

Says the most recent proliferation of options with zero days to expiry has similar potential to create market turmoil

Kolanovic:

“While history doesn’t repeat, it often rhymes”
the selling of these “daily and weekly options is having a similar impact on markets.”

Bloomberg (gated) carry more on Kolanovic’s note. In brief:

options dealers take the other side of trades and must buy and sell stocks to keep a market-neutral stance

Since 0DTE options rarely get in the money, their market impact is now mostly felt through volatility suppression and an intraday buy-the-dip pattern that results from hedging, according to Kolanovic.

However, should the market stage a big move that put these contracts in the money, that would force options dealers to unwind a large amount of their positions, warns the strategist … On a big down day such intraday selling would reach $30 billion, his model shows.

“These flows could particularly impact markets given the current low liquidity environment,”
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“Volmageddon” was a term coined to describe the very rapid and dramatic drop in the value of short-volatility exchange-traded products in early February 2018. The triggers are eerily familiar, a combination of: