Abstract
A previously unrecognized channel through which index options trading impacts the underlying market is that delta hedges of expiring cash-settled index options are unwound at expiration. This contrasts with physically-settled options, where the delta hedge positions in the underlier are used to settle the options position. We use proprietary data to determine market maker positions in expiring S&P 500 index options, and show that hedge unwinding trades have important impacts on index futures returns and volatility during the 30 minutes before options expiration. We also study the impact of options market maker hedge rebalancing trades on market volatility.
Keywords: 0DTE options, S&P 500 index options, hedge unwinding, hedge rebalancing, gamma squeeze, options trading
The views, analysis and figures are the author’s own and do not necessarily reflect those of algoseek. This content is for educational purposes only and is not investment advice.