0DTE Analysis Framework

0DTE stands for zero days until expiration. These are options that expire that same day. (Likewise, 1DTE, 2DTE, etc. stand for one day until expiration, two days until expiration, etc. Options that expire in one day, two days, etc.)
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0DTE charts are available for Volland 3, Volland 30, and Volland Live. They update on the timeframe of your subscription (i.e., 0DTE charts are updated every 30 minutes in Volland 30). To see a 0DTE chart in Volland, select your ticker, your greek, and today’s expiration only.

These are the core principles and assumptions underlying this framework. These principles are realistic and have shown to be true with our own observations and discussions with MMs. Under these principles will be their rationale.
 
Principle #1:
Dealers need to be fully hedged by the end of the day, including in 0DTE.
In the old days, dealers had to hedge all their 1st- and 2nd-order greeks within a range and fill out a form of their book to prove it. If they failed one greek once, they were warned. If they failed twice, they were fired, and likely not hired to any other MM firm! Also, note that we do not yet know for sure the dealer’s position in the underlying.
 

1. Dealers warehouse their intraday risk until 2-3 p.m.​ There is so much volume (particularly in 0DTE options) that dealers don’t complete their hedging task until the end of the day. This was also noticed by the CBOE data department. This creates opportunity, but the fact that these strikes may not act as strong as they seem until closer to the end of the day. I refer to this timeframe as “dealer o’clock”. The reason for this is if dealers dynamically hedge with all the 0DTE volume coming in, they will be swiftly whipsawed and lose money on positions.
2. Dealers may hedge their exposure sooner if there is strong volatility. If the market goes far out of bounds, dealers will hedge before dealer o’clock. I would consider “out of bounds” ~2STD of the opening straddle price. Dealers do like strong movement, because then they can consistently hedge in one direction without fears of being whipsawed out of positions.
3. Before 2:00 p.m. Eastern, delta and gamma have the largest effect on 0DTE – but has minimal impact on forecasting where price will go. Afterward, charm and vanna have a larger effect. This assumes significant volume in 0DTE options, and must be checked against the cumulative effect in the exposure charts. That is, check the y-axis (notional dollars hedging) in the exposure charts by greek for the largest dollar impact at that time.

 
Principle #2:
Dealers will trade options to become risk neutral in aggregate vanna and charm.
Vanna and charm are two sides of the same coin, that being premium of the option. The option premium is made up of two components: time and IV. Both are difficult to hedge when moving quickly, and both move quickly on 0DTE.

1. Dealers hedge to deltas, not PnL. The PnL follows the delta hedging. Therefore, vega and theta are not the greeks to focus on – vanna and charm are. Dealers do have to report their aggregate vega and theta positioning; however, they tend to be hedged through VX futures and other options. On the 0DTE timeframe they tend to hedge using other options to have dynamic hedging in premium.

 
Principle #3:
Premium is 0 when options expire.
This is the primary difference between 0DTE and higher-order Volland. On a higher order Volland (particularly on the 30-day timeframe), there is a consistent spot-vol correlation that is the basis for skew, vanna moves, etc. 0DTE is simpler because IV and time premium run to 0. So, you know exactly the direction of IV and the impact on underlying hedging requirements.

1. Charm and Vanna will both need to be hedged in the same direction as IV approaches 0. Vanna is typically lower than charm in notional hedging needed, but because premium will run down to 0 no matter what underlying price does, charm and vanna will require hedging in the same direction. For this reason, I focus on charm, but targeting vanna can produce similar analysis.
2. Charm/Vanna Balance allows less need for strong end of day hedging. Because premium trends to 0 no matter what on 0DTE, the flows could be very strong towards the end of the day.
3. Gamma impact is inversely correlated to the remaining IV in the 0DTE vol plane. On all fronts, gamma impact is inversely correlated to the IV levels. IV reduces the impact of gamma quite a bit. Toward the end of a boring day where IV melts sooner than normal, gamma may have an impact. The nature of gamma requires an outside force to make any sort of analysis on it effective, and sometimes that force is the vanna/charm impact as IV trends towards 0 anyway.

 
Principle #4:
0DTE options are cheap greeks.
While one 0DTE ATM option has a higher gamma than a 20DTE ATM option, its sphere of influence is much smaller. Therefore, as price moves, the greeks of the 0DTE option mean less. This is important because the initial option positioning will have less of an effect the further price moves away from it.