December 21, 2022
“The jump in short-dated activity has some market commentators concerned that related hedging activity is having a ‘pinning’ effect on the underlying. Others see short-dated index flows impacting volatility around events. Garrett DeSimone, head of quantitative research at OptionMetrics, said he believes the increased flows in short-dated options is a factor in higher volatility around events, such as a CPI number or an expiration. ‘What I’ve noticed is that there’s been a lot more retail flow. especially in short-dated options, even picking up at the index level,’ he said. noting that with dealers having to hedge this short-dated order flow, there is a knock-on effect for volatility. ‘This is because these front-month options are packed with gamma, which the dealers need to hedge following the news,’ he said. ‘I think, as a structural change moving forward, we will see larger dispersion from day to day in returns.’”
Read the full EQDerivatives, Inc article, “Is The Short-Dated Options Boom Changing Index Vol Dynamics?” to gain more insights from OptionMetrics on short-dated options.