The 0DTE Feedback Loop

Is This Wall Street's Infinite Money Glitch?

1. Mechanics in 30 Seconds

• Buy during the day
  A trader scoops up SPX 0-DTE calls. Dealers, now short high-gamma exposure, buy index futures to hedge.

• Reflexive lift
  Those futures-buys nudge SPX higher. Rising spot pushes call deltas up, so dealers must buy even more futures.

• Sell at MOC
  By market close, theta has all but evaporated extrinsic value—calls trade almost pure intrinsic (Δ≈1, Γ≈0). Dealers unwind the call position (buy back) but leave their futures hedges intact.

---

2. Why the Exit Doesn’t Reverse the Move

It’s tempting to think “dealers unwind everything, so SPX should sell off.” In reality, dealers re-deploy their long futures in four overlapping ways:

1. Offsetting other client flows
   New option-flow from other clients often requires the same directional hedge.

2. Closing auction rebalances
   Futures positions get flattened or adjusted in the closing auction, not liquidated outright.

3. Cross-hedging and block trades
   Dealers can roll hedges or swap blocks with institutional buyers without hitting the tape.

4. Prop carry
   If overall sentiment stays bullish, dealers simply let their residual futures positions ride on their proprietary books.

Because of this recycling, the hefty bid created by 0-DTE gamma doesn’t evaporate when the options expire.

---

3. Who Ultimately Pays?

The “cost” of this reflexive mechanism shows up in three places:

• Late retail
  On quiet days, theta decay crushes held calls, penalizing anyone who doesn’t exit before expiration.

• Market liquidity
  Strike-pinning compresses volatility around expiry, fattens the left-tail of returns, and can leave other participants on the wrong side of lumpy auctions.

• Dealers (rarely)
  In extreme tail-gaps, inventories can blow out before they’re fully hedged—once in a blue moon these gaps land on dealer books.

---

4. Kill-Switch Conditions

That near-infinite-money refi has limits. Three scenarios can flip the script:

1. Volatility spike
   A sudden vol rerate makes calls expensive again, eroding the convexity arbitrage.

2. Macro shock
   A CPI miss or geopolitical flash can overwhelm dealer gamma, forcing genuine hedging pain.

3. Dealer gamma flip
   If dealers turn net short gamma, they must sell futures into falling markets, accelerating the drop.

When any of these “kill” triggers hit, the bid-stack from 0-DTE flow can unravel quickly.

---

5. Takeaway

0-DTE call flow is a powerful, reflexive source of market lift—almost an “infinite-money glitch” for SPX during U.S. hours. But it isn’t bulletproof. Sharp vol repricings, big macro surprises, or dealer gamma flips can all shut off the bid-stream. For traders looking to fade the moves, the hurdle to be bear-leaning intraday is extraordinarily high—until one of those kill-switches fires.

---