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.
