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Ifin Seminar, Aurelio Vasquez - ITAM, Business School "0DTE Index Options and Market Volatility: How Large is Their Impact?"

Institute of Finance

Date: 14 November 2024 / 12:25 - 13:40

Speaker: Aurelio Vasquez - ITAM, Business School

Title:      "0DTE Index Options and Market Volatility: How Large is Their Impact?"

Date:     November 14, 2024

Ore:        12:25 - 13:40

Room:     Blue Room (Executive Center)

Lugano West Campus

 

 

Abstract

The large volume of trading in 0DTE S&P 500 index options suggests that options market makers (OMMs) have large positions in these options. Because short-dated options have large gammas, OMMs’ hedge rebalancing trades might be large enough to impact the index. We estimate the maximum impact of OMM gamma on index volatility using proprietary trade data to determine the aggregate position of OMMs, and their gamma. We then estimate models that relate market volatility to the OMM gamma, and simulate the models under the counterfactual assumption that OMM gamma does not impact volatility to identify the impact of OMM gamma.