Forget 0DTE: Is This The Next Volatility Timebomb

It was about a year ago that a major market structure feud broke out on Wall Street between alarmists like JPM's Marko Kolanovic, on one hand, warning that 0DTE would lead to another Volmageddon-style market crash as a result of a self-reinforcing cascade of selling sparked by a short-vol circuit breaker, and far more sanguine strategists, like BofA's Benjamin Bowler, who countered that 0DTE will not only not result in a new Volmageddon, it wouldn't have a major adverse impact on the market at all. Needless to say, with the S&P trading at all time highs, the optimists have been proven right (so far) and those who, like Marko, expected another Volatility neutron bomb to finally validate his bearish thesis, have been left nursing staggering margin calls.

But what if the market's attention has been focused on the wrong bouncing ball and what if it's not 0DTE that is the ticking derivative timebomb that will unleash a volatility explosion across the supremely complacent market? What if the market imbalances and tensions are accumulating in another derivative product that is just waiting for the right - or rather wrong - place and time to erupt and wipe out millions of vol selling daytraders?

We are talking about option-based ETFs in general, and call-overwriting strategies in particular: products, which at their core, are short-volatility trades which were the key factor in the stock plunge in February 2018 when they wiped out in epic fashion sending various inverse vol products collapsing literally to 0. Now they’re back in a different form, and at a much, much bigger scale, as investors - hypnotized by the meltup in a handful of AI names - are betting vast sums of money into strategies whose upside depends on continuing equity calm.