The VIX is dead, long live the VIX

The rise of 0DTE (zero day to maturity options) is a recent phenomenon. Option volume has really taken off during Q4 2022 and has deeply impacted market behavior and structure.  For the ones not really fully acquainted with the matter, May 2022 is the month where it all started. Basically, every trading day is  now an option maturity day for the E-Mini S&P 500 contracts.

Market participants have embraced Near or 0DTE options trading with both hands. The VIX is calculated using derivatives that expire 23 to 27 days into the future and Wall Street, as always, has been quick in coming up with a solution.

0DTE VIX is now official and available to all.

The RED line is the new VIX or VIX1D. Blue line is the traditional VIX index and in light gray you have the S&P 500 index.  (click on the chart and can access a live version at Investing.com).

One observable impact are narrow trading range periods (last two trading weeks December 22, first two week in February 23, March 10th-24th, then almost the whole month of April 23 which showed some more interesting moves the last four trading days.

It is hard to really draw any definitive conclusions in regards to what is really driving 0DTE volatility but 0DTE flows seem to have become an alternative to the use of E-Mini contracts. Is the market adding an additional systemic layer of risks?  SGG believes that 0DTE is impacting overall market liquidity since such options are used as an alternative to E-Mini contracts. The last few trading days of April offered clear evidences. Relative small e-mini futures block orders would easily impact price by $2-$5 in the split of a second.

SPOTGAMMA  has developed a few tools for monitoring such option flow and here is an article about their first impression of the New 0DTE VIX.

https://www.zerohedge.com/markets/welcome-trading-new-daily-vix