Does The VIX Need A Reboot? | Investing With IBD | Summary and Q&A

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March 5, 2023
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Investor's Business Daily
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Does The VIX Need A Reboot? | Investing With IBD

TL;DR

Zero DTE options have become increasingly popular as a cheaper alternative, but their rapid time decay and potential manipulation make them a risky trading strategy.

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Questions & Answers

Q: What are the main advantages of trading zero DTE options?

Zero DTE options are cheaper, making them an appealing choice for traders. However, their affordability comes with the risk of rapid time decay and the need to accurately predict short-term market movements.

Q: How does the VIX calculation affect zero DTE options?

The CBOE adjusts the VIX calculation by excluding the nearest dated options, including zero DTE options. This can lead to the underestimation of market volatility and potentially mislead traders using the VIX as a market sentiment indicator.

Q: Are zero DTE options prone to manipulation?

Zero DTE options can be used for various purposes, including market manipulation or hedging existing exposure. Large trades in these options can potentially impact market prices, creating opportunities for sophisticated traders.

Q: Is trading zero DTE options suitable for all investors?

Trading zero DTE options requires advanced knowledge and understanding of options trading. Due to their binary nature and rapid time decay, they are best suited for experienced traders who can handle the risks associated with them.

Summary & Key Takeaways

  • Zero DTE options refer to options contracts that have zero days until expiration. These options experience rapid time decay, especially in the final 30 days.

  • The popularity of zero DTE options lies in their perceived affordability, but traders need to consider the potential risks and binary outcomes associated with these contracts.

  • The CBOE adjusts the VIX calculation by dropping the nearest dated options to smooth the volatility measure. Traders using zero DTE options may be trading with a higher VIX level than they realize, leading to inaccurate market sentiment readings.

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