In two recent media appearances, Brent Kochuba, Founder of SpotGamma, broke down his theory about how impactful NVDA short dated options are to the US stock market.
Hint: very.
First, this was discussed with Victor Jones of TasyTrade, and then with Jack Forehand of ExcessReturns.
In recent market activity, we’ve seen significant movement in NVIDIA (NVDA) stock, driven largely by 0DTE (zero days to expiration) options and underlying liquidity issues. This phenomenon has caught the attention of traders and analysts alike, prompting a deeper look into its implications for trading strategies and market dynamics.
The summary of this idea is that huge short dated NVDA options flow is forcing dealer hedging in the underlying stock. That forced trading occurs into a very illiquid NVDA stock, which drives volatility. Because NVDA is such a massive component of various indexes & ETF’s, it movement creates a chain-reaction across US equities.
Key Points:
- NVDA 0DTE Options Volume:
- Unprecedented volume in NVIDIA’s 0DTE options
- On September 20, 2023, NVIDIA’s call volume reached 25 million contracts, far surpassing other major stocks, with SPY being the next largest (16mm calls).
- This high volume is creating significant price movements in the underlying stock
- Limited Underlying Liquidity:
- The tradable float of NVIDIA shares may be much smaller than commonly believed
- Institutional ownership and ETF holdings – 523 individual ETF’s own NVDA shares – significantly reduce the available shares for trading
- This limited liquidity amplifies the impact of options-related buying and selling
- Impact on Market Dynamics:
- The combination of high 0DTE options volume and limited liquidity is creating rapid, volatile price movements in NVIDIA stock
- These movements are influencing broader market indices due to NVIDIA’s large weighting
- The phenomenon is leading to what some analysts call “correlation spasms” in the market
- Trading Strategies:
- Traders are adjusting their strategies to account for this increased volatility
- Some are focusing on longer-dated options to avoid the day-to-day volatility
- Others are using defined risk strategies to capitalize on the high implied volatility
- Broader Market Implications:
- The NVIDIA effect is spilling over into other tech stocks and market indices
- It’s creating challenges for traditional portfolio management and risk assessment
- The phenomenon highlights the growing influence of options markets on stock prices
- Future Outlook:
- Market participants are closely watching for potential regulatory responses to the 0DTE options phenomenon
- There’s debate about whether this is a temporary market anomaly or a lasting change in market structure
- Traders and investors are advised to stay informed and adapt their strategies accordingly
Conclusion: The interplay between NVDA 0DTE options and underlying liquidity is reshaping market dynamics, creating both challenges and opportunities for traders. As this phenomenon continues to evolve, it’s crucial for market participants to stay informed and adapt their strategies to navigate this new landscape effectively.
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