This Stock Market Crash Is Different

This stock market crash is different and unlike any other crash we have ever seen before. The implications are shocking. Since February the S&P has declined over 1000pts for a drop of 17.6% in just over 6 weeks. 10.5% of that came only from the closing price on Wednesday to just this past Friday afternoon, barely 48 hours total. The Nasdaq 100 has also now entered bear market territory, down 22% from it's all time high in late February. I can explain at about the impact that the macro, technical, market positioning has on the selling - we all know a book could be written about tariffs and/or capital flight from the rest of the world vs. the US, but I'd like to discuss something else that may be flying under the radar, and that is the impact that 0DTE options have on the current environment. A few weeks ago I wrote that this selloff was very different than anything I had seen in my nearly 15 years of experience. While I was incorrect in my suspicion that we would see a significant bounce before March opex, (we did end up rallying beforehand but the bounce did not meet my expectations - there was however another shoe to drop later in the month as I referenced nonetheless) the fact remained and still does that the nature of the selling was not normal.

Programmed and organized 0DTE put buying makes a beeline for the dealer level

I have seen the type of selling pictured above many times since 0DTE was implemented back in late 2022, however typically it only lasted for short periods of maybe a few days to a week or two at most, and had never led to declines like the one we are witnessing now.

The tight and controlled straight line selling you see above is caused by 0DTE put buyers who execute structured sell programs that include a combination of DITM, ATM, and OTM strikes in order to force market makers to hedge down, all while keeping the nature of the selling orderly. The short dated orderly index selling does not break dispersion or cause spreads or the VIX to expand and the seller(s) can repeat this daily as those contracts roll off at the end of each day, which doesn't leave them on the hook overnight. Once they reach their target price (such as the 5565 put wall from the JPM collar, which NOT coincidentally was almost exactly where price stopped going down in the example above) they can simply buy shares while market makers help to keep price pinned to that strike and/or let themselves be assigned to a larger short put position that they have already put on prior to starting the said selloff. Have you noticed that over the past 2 years the stock market has tended to recover from a Friday selloff differently than the usual process of gapping down the following day then V shaping after the open? This past year we've seen several examples of price bottoming after closing at the lows on Friday and then simply gapping up and ripping higher on Monday. This change is not by accident. That delta that was pushing price lower into the Friday close rolls off after the Friday expiry and so dealers have no reason to hold their short stock since the options they sold no longer exist afterward. Combine that with the traders who often get stopped out on long positions into the weekend and you get the recipe for a monster unwind rally the following week. There are countless examples that I could breakdown such as SPY/SPX between the dates of 4/12/24 - 4/19/24, 9/3/24 - 9/6/24, or 10/30/24 - 10/31/24 and I will likely do a full video on the subject at some point in the future but in the interest of time I'll suffice to say that all of those examples above, equities were in a bull market. Read more about these dealer strategies Why this is so crucial? Because given the recently price activity - namely the last 2-3 sessions, we have never seen what 0dte can do in a bear market environment. Yes we have had declines like Spring and Fall 2023, or even sharp ones like last August, but the key difference is that back then dealers were never really lacking control of volatility and markets we're being heavily supported by populist election year flows and a ridiculously dovish Treasury issuance. 0DTE is still only 2 years old, and until now, there has a never been a test of how it will impact volatility, spreads, and liquidity. Cem Karsan on the risks of 0DTE during a high volatility environment - (X.com @jam_croissant)

In short, if market volatility cannot be contained 0DTE presents a very unique risk as the shortest dated expiry has the highest sensitivity to gamma which can exacerbate selling pressure that is already overpowered as is. This may lead to regulation, policy changes and new margin requirements across the board. At this point, I am shocked that 0DTE hasn't already become the scapegoat for the selloff though something tells me that it is about to be. Sunday's globex open should be a fun start to what will surely be another historic week in the markets. 🔐For access to premium trading content including swing trade alerts & live day trading room visit 👉 - https://www.carnivoretrades.com/ 

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