JPMorgan is warning about a "Volmageddon 2.0" with the explosion in the use of zero-days-to-expiration options, estimating that these risky contracts could exaggerate declines to as much as 20% during market turmoil. 0DTE options are contracts with a fleeting shelf life, expiring the same day that they're traded. Daily notional volumes in these 0DTE options that track the S & P 500 recently reached a record above $1 trillion, according to JPMorgan data.
The bank then estimated the net option delta before and after the hypothetical market shock, taking the difference as the amount of E-mini futures needed to trade to unwind. Delta is the theoretical estimate of how much an option's value may change given a $1 move up or down in the underlying security. JPMorgan concluded that, for market shocks between a 1%-5% loss, the corresponding market impact from these option positions having to be unwound averages to a decline in the range of 4% to 8.