Your carefully curated long-term stock portfolio is now collateral damage in a daily derivatives war.
The market’s traditional rhythm has been hijacked by Zero-Day-to-Expiration (0-DTE) options, a high-stakes game played in minutes, not years. The fundamental value you painstakingly research is being sideswiped by massive, unseen derivative flows that spark violent price swings from nothing.
These are not random fluctuations; they are gamma-driven dislocations rewriting the rules of intraday price action. Ignoring this structural shift is like navigating a hurricane with a weather map from last century.
This new reality demands a new playbook, and understanding this battlefield is the first critical step to defending your capital. This guide provides the intelligence and the armor you need.
The 0-DTE Revolution: Anatomy of an Intraday Market
The emergence of 0-DTE options as the dominant force in U.S. index derivatives trading is not an incremental development but a structural market rupture.
Understanding this phenomenon requires a quantitative appreciation of its scale, a mechanical understanding of its appeal, and a nuanced analysis of its impact on the market’s stability and behavior.
The Explosion in Volume: A Data-Driven Overview
The growth of 0-DTE options trading has been nothing short of explosive, transforming them from a niche product into the primary engine of listed options market activity.
This surge was catalyzed in 2022 when the Cboe Global Markets expanded its offering of weekly S&P 500 contracts to feature expirations for every day of the trading week, a move that unlocked a torrent of demand for intraday strategies.
The statistical evidence of this transformation is stark. In the fourth quarter of 2024, 0-DTE options on the S&P 500 Index (SPX) became the most traded of any expiration, surpassing all other expiration dates combined.
These contracts averaged over 1.5 million trades daily, constituting 51% of total S&P 500 options volume—a dramatic increase from 2021, when they accounted for less than half that share.
By mid-2023, 0-DTEs already represented over 40% of all SPX options trades. Data from the Financial Industry Regulatory Authority (FINRA) corroborates this trend, showing that between January 2022 and January 2023.
The number of opening 0-DTE options positions increased by approximately 60% overall, with an even more pronounced jump of 75% among retail customers.
This surge is not confined to a single user group; it is a broad-based phenomenon involving both institutional and retail investors. However, the role of the retail trader is particularly noteworthy.
According to Cboe’s head of derivatives market intelligence, retail participants were responsible for a staggering 50% to 60% of 0-DTE trading volume as of May 2025.
This high level of retail engagement is a critical component of the market dynamics, influencing order flow and sentiment in ways that differ significantly from institutionally dominated markets.
Recognizing the immense demand, exchanges have continued to expand the universe of assets with daily expirations.
In late 2023, Nasdaq introduced weekly options contracts on a series of exchange-traded funds (ETFs) that track key commodities like gold (GLD), silver (SLV), natural gas (UNG), oil (USO), and long-term Treasuries (TLT), making 0-DTE strategies accessible across a wider range of asset classes.
Despite this expansion, the core of 0-DTE liquidity remains concentrated in the major U.S. equity indices—SPX, SPY (SPDR S&P 500 ETF Trust), and QQQ (Invesco QQQ Trust)—and a handful of highly liquid mega-cap stocks such as Tesla (TSLA).
| Metric | 2021-2022 Data | 2023-2024 Data | Q1 2025 Projection | Source(s) |
| % of Total SPX Volume | < 25% (2021) | 43% (mid-2023), 51% (Q4 2024) | Continued upward trend | |
| Avg. Daily SPX Contracts | N/A | > 1.5 million (Q4 2024) | N/A | |
| Retail % of Volume | N/A | 50-60% (May 2025) | N/A | |
| Growth in Opening Positions (YoY) | 60% (Jan 2022-Jan 2023) | N/A | N/A | |
| Growth for Retail (YoY) | 75% (Jan 2022-Jan 2023) | N/A | N/A |
The Mechanics of Haste: Gamma, Theta, and Trader Psychology
A 0-DTE option is defined as any options contract that is set to expire at the end of the current trading day.
This extreme proximity to expiration fundamentally alters the risk characteristics of the contract, magnifying the influence of two specific options Greeks: gamma and theta.
This creates a unique risk/reward profile that is highly attractive to a certain class of market participants.
The primary allure lies in the behavior of the Greeks on the day of expiration. Gamma (Γ), which measures the rate of change in an option’s delta (Δ) for a one-point move in the underlying asset, reaches its maximum value for at-the-money options on this day.
This means that even minor fluctuations in the underlying index or stock can produce exponential changes in the option’s price and its directional exposure.
This property offers traders immense leverage for a relatively small capital outlay, allowing for potentially outsized gains from small, correct intraday predictions.
Simultaneously, theta (Θ), which measures the rate of an option’s value decay with the passage of time, is also at its peak.
The entire remaining extrinsic value of a 0-DTE option must decay to zero by the close of trading. This rapid erosion of premium is a powerful magnet for option sellers, who aim to collect this decaying value as income.
Empirical analysis shows that this decay is not linear throughout the day; it is a gradual process in the morning that accelerates dramatically in the afternoon, with the most significant drop-off occurring around 3:30 PM ET.
This creates a high-stakes battle between gamma-seeking option buyers and theta-harvesting option sellers.
These mechanical properties give rise to several key motivations for traders:
Targeted Event Hedging and Speculation:
0-DTEs provide a cost-effective and capital-efficient tool to express a view on or hedge against specific, time-bound intraday events, such as the release of the Consumer Price Index (CPI) or a Federal Reserve policy announcement. Trading volume in 0-DTEs often explodes around these key economic data points.
Elimination of Overnight Risk:
Because positions are initiated and closed within a single trading session, traders are not exposed to the risk of adverse price movements caused by overnight news or market gaps.
This is a significant advantage in a market environment characterized by geopolitical and macroeconomic uncertainty.
High Frequency of Opportunity:
With daily expirations on major indices, traders have a fresh slate of opportunities every single day, allowing for the repeated deployment of short-term strategies.
The Market’s Reaction: Volatility, Liquidity, and Systemic Risk
The meteoric rise of 0-DTEs has ignited a fierce debate among market participants and regulators regarding their impact on overall market stability. Proponents argue that these instruments enhance market liquidity and provide more efficient tools for risk management.
Critics, however, contend that the sheer volume and unique characteristics of 0-DTEs can intensify market swings, as the rapid hedging of positions can amplify price movements and introduce new feedback loops into the system.
The central mechanism through which 0-DTEs influence the underlying market is the hedging activity of market makers. As dealers and liquidity providers sell options to the public, they take on risk that must be neutralized.
For instance, when a dealer sells a call option, they acquire negative delta and negative gamma exposure. To hedge this, they must buy shares of the underlying asset.
As the underlying price moves, the delta of the option changes (at a rate determined by gamma), forcing the dealer to continuously adjust their hedge by buying or selling the underlying asset.
Because 0-DTE gamma is so extreme, these hedging flows are magnified and can become a primary driver of intraday price action.
This has led to a significant structural change in the market, creating what can be described as a “volatility paradox.” On many trading days, the market exhibits suppressed volatility.
This occurs because a large contingent of 0-DTE participants are net sellers of options, often through defined-risk strategies like iron condors, to collect the rapid theta decay.
When the public is net-short options, market makers become net-long options and, consequently, net-long gamma. A long-gamma position requires hedging by selling into market rallies and buying into market dips to maintain a delta-neutral book.
This continuous counter-trend flow acts as a powerful intraday stabilizing force, effectively dampening minor fluctuations and “pinning” the market within a range. However, this stability is exceedingly fragile.
If a market catalyst—such as an unexpected economic report—is powerful enough to push the market beyond a key strike level, this stabilizing mechanism can violently reverse.
Dealers are forced to abandon their counter-trend hedging and begin chasing the trend to manage their risk, amplifying the move and potentially creating an explosive intraday trend. The very force that creates calm is the fuel for chaos.
This dynamic raises the critical question of systemic risk. The current expert consensus is that 0-DTE options do not pose a systemic risk to the broader financial markets.
The primary reason is their extremely short duration. Unlike longer-dated derivatives that led to the 2008 financial crisis, 0-DTEs do not allow for the slow buildup of large, unhedged, system-threatening positions.
They are typically settled intraday, preventing the “inventory warehousing” of risk that could cascade through the system.
Despite this consensus, there are significant, nuanced concerns about market stability.
The sheer volume of trading can create areas of “unbalanced short gamma,” where dealer hedging can exacerbate directional moves, particularly during periods of low liquidity or in conjunction with major macroeconomic events.
A more subtle but potent risk lies within the clearing and margining infrastructure. Some clearing firms may lack the sophisticated systems required to accurately assess and collect margin on an intraday basis.
This could allow traders to accumulate significant uncollateralized intraday risk, which, in a stress scenario, could pose a threat to the clearing firm itself.
This concern is not merely theoretical; it has prompted regulatory bodies like the Options Clearing Corporation (OCC) to propose new rules, such as an Intraday Risk Charge, specifically aimed at mitigating the risks posed by the surge in 0-DTE activity.
Regulators are paying close attention. FINRA has issued investor insights specifically highlighting the amplified risks of 0-DTEs, including the potential for unlimited losses for uncovered sellers and the applicability of Pattern Day Trader (PDT) rules.
Furthermore, a September 2023 Senior Credit Officer Opinion Survey (SCOOS) from the Federal Reserve revealed that among dealers with active 0-DTE clients, a majority only collect margin on these trades before the end of the session when market volatility is already elevated, and two-fifths do not collect intraday margin at all.
This indicates that risk management practices may be reactive rather than proactive, a potential point of failure during a sudden market shock.
The Gamma Squeeze: When Hedging Becomes the Catalyst
The structural changes wrought by the 0-DTE revolution provide the necessary conditions for a powerful and often misunderstood market phenomenon: the gamma squeeze.
This event represents the most acute manifestation of options market flows driving spot market prices. It occurs when the reflexive, mechanical hedging activity of options market makers becomes the primary catalyst for a rapid, accelerating, and often violent move in an underlying asset’s price.
Understanding its mechanics is crucial for any investor seeking to navigate the modern market landscape.
Deconstructing the Feedback Loop
A gamma squeeze is a rapid, self-perpetuating price increase caused by the forced hedging activity of options market makers who are net short call options. It is fundamentally different from a short squeeze.
A short squeeze is driven by investors who have shorted a stock being forced to buy it back (buy-to-cover) to close their positions, often due to margin calls as the price rises against them.
Gamma squeeze, in contrast, originates in the derivatives market and is driven by the delta-hedging requirements of liquidity providers.
The mechanism unfolds through a powerful positive feedback loop, which can be broken down into the following steps:
The Spark:
Concentrated Call Buying. The process begins when a significant volume of call options, particularly out-of-the-money (OTM) and short-dated contracts, are purchased by a large number of speculators. This buying reflects a strong bullish conviction and a desire for leveraged upside exposure.
The Dealer’s Position:
Market makers and dealers are typically the sellers of these options. In doing so, they take on a net short call position, which exposes them to negative delta (they lose money if the stock rises) and, crucially, negative gamma (their negative delta exposure accelerates as the stock rises).
Initial Hedge and Price Rise:
To offset their initial negative delta, dealers buy a certain number of shares of the underlying stock.
This initial hedging, combined with the bullish sentiment that drove the call buying in the first place, begins to push the stock’s price higher.
The Gamma Effect Ignites:
As the stock price rallies and approaches the strike prices of the OTM calls the dealers are short, the gamma of those options explodes. This causes the delta of the options to increase rapidly.
For example, a far OTM call might have a delta of 0.10, but as the stock price nears its strike, the delta might quickly jump to 0.30, then 0.50. This means the dealer’s position is becoming “more short” at an accelerating rate.
Forced Hedging Cascade:
To maintain a delta-neutral book, the dealer is now forced to buy more shares of the stock to offset this rapidly increasing negative delta.
They are no longer buying based on a fundamental view, but as a mechanical risk-management necessity. This wave of forced buying occurs at progressively higher prices.
The Self-Perpetuating Loop:
This large-scale, price-insensitive buying from dealers adds significant fuel to the rally, pushing the stock price even higher.
This, in turn, further increases the gamma and delta of the short calls, forcing the dealers into yet another round of buying. This creates a powerful, explosive positive feedback loop where hedging activity begets higher prices, which begets more hedging activity.
The squeeze continues until the buying pressure from speculators abates or the options expire, at which point the upward pressure can vanish as quickly as it appeared.
| Characteristic | Gamma Squeeze | Short Squeeze |
| Primary Catalyst | Concentrated buying of call options | A rally in a heavily shorted stock |
| Key Actors | Options speculators vs. Options market makers | Stock buyers vs. Stock short sellers |
| Driving Mechanism | Forced delta-hedging by market makers to neutralize gamma exposure | Forced buying-to-cover by short sellers to close losing positions (often due to margin calls) |
| Associated Financial Instrument | Options (primarily short-dated, OTM calls) | Equities (shares sold short) |
Case Study Analysis: From Meme Stocks to Mega-Caps
The gamma squeeze phenomenon entered the public consciousness during the “meme stock” craze of 2021, but its mechanics are not limited to distressed companies.
The evolution of these events from niche, targeted episodes to potential features of mainstream trading highlights a broadening of this specific market risk.
The Archetype: GameStop (GME) & AMC Entertainment (AMC) (2021) The events surrounding GameStop and AMC in early 2021 serve as the classic examples of a gamma squeeze operating in tandem with a historic short squeeze.
These episodes were driven by a unique confluence of factors:
- Extremely High Short Interest: Both companies were heavily shorted by institutional hedge funds who believed their business models were failing.
- Coordinated Retail Buying: A large community of retail traders, primarily organized on Reddit’s r/wallstreetbets forum, coordinated a campaign to buy shares and call options en masse.
- Aggressive OTM Call Purchases: The traders specifically targeted cheap, short-dated, out-of-the-money call options. This strategy maximized the gamma impact for every dollar of premium spent, effectively weaponizing the market makers’ hedging requirement.
The result was a dual-pronged assault. As the stock price began to rise from the direct share purchases, it triggered the gamma squeeze feedback loop, forcing dealers to buy shares.
This dealer buying, in turn, inflicted more pain on the short sellers, triggering margin calls and forcing them to buy back shares at any price, which further fueled the rally.
It was a perfect storm where the two distinct “squeeze” phenomena fed off each other, leading to price increases of over 1,000% in a matter of weeks.
The Modern Example:
Nvidia (NVDA) (2024) A more recent and arguably more significant case for the long-term investor is the market action in Nvidia during its run to a $3 trillion market capitalization in May-June 2024.
Unlike GameStop, Nvidia is a market-leading behemoth with stellar fundamentals driven by the artificial intelligence boom.
The potential gamma squeeze in NVDA was not driven by a narrative of punishing short sellers; rather, it was a byproduct of immense, one-sided bullish momentum expressed through the options market.
Traders, eager to participate in the stock’s meteoric rise with less capital, flooded the market with call option purchases. The sheer volume of this options flow, particularly in shorter-dated contracts, created a massive short gamma position for dealers.
As Nvidia’s stock continued its relentless climb, dealers were forced into a continuous cycle of buying shares to hedge their escalating exposure, likely amplifying the speed and magnitude of the rally.
While it is difficult to disentangle the effects of the gamma squeeze from the underlying fundamental euphoria, the episode demonstrates that this mechanism is no longer confined to the fringes of the market.
Any stock with sufficient options liquidity and powerful directional momentum can now be susceptible to gamma-driven price acceleration.
This evolution from a “meme” squeeze on distressed companies to a “momentum” squeeze on market leaders has profound implications for a long-only portfolio, which is often concentrated in these very same large-cap, high-momentum names.
Identifying the Precursors: An Analytical Checklist
While predicting a gamma squeeze with certainty is impossible, analysts can monitor a set of key indicators that signal a heightened probability of such an event occurring:
Unusual Options Activity:
This is the most direct signal. A sudden, dramatic surge in the trading volume of short-dated, out-of-the-money call options is a primary red flag.
Tools that track options order flow and monitor metrics like the put/call ratio can help identify these anomalies.
High Short Interest:
Although a gamma squeeze can occur without it, a high level of short interest acts as an accelerant. It creates a second pool of potential forced buyers (the short sellers), making the feedback loop more explosive.
Elevated Social Media and Retail Sentiment:
For stocks with high retail participation, monitoring sentiment on platforms like Reddit, X (formerly Twitter), and StockTwits has become a necessary component of risk analysis. Coordinated buying campaigns often originate in these forums.
Market Maker Gamma Exposure (GEX):
More advanced analysis involves estimating the aggregate gamma position of market makers for a given stock or index. A large negative gamma exposure indicates that dealers are significantly net short gamma.
In this state, they will act as accelerants to market trends—buying into rallies and selling into declines—making the market vulnerable to a squeeze. Conversely, a large positive gamma exposure means dealers will fade trends, acting as stabilizers.
A Shield for the Long-Term Investor: Hedging a Long-Only Portfolio
The market dynamics described in the preceding sections—intraday volatility driven by 0-DTE flows and the potential for explosive gamma squeezes—present a formidable challenge to the long-only investor.
Traditional diversification may prove insufficient to protect a portfolio against these new, rapid, and systemic forms of risk.
This final section provides a practical and detailed guide to using options not as speculative instruments, but as tools of strategic defense, akin to purchasing insurance for a valuable asset.
Introduction to Hedging with Options: From Speculation to Insurance
The fundamental mindset required for effective hedging is a shift from prediction to preparation.
The objective is not to forecast the market’s next move but to structure a portfolio that can withstand an adverse move while retaining upside potential. Options, in this context, serve as a form of insurance policy.
An investor pays a premium (the cost of the option) to transfer a specific risk—in this case, the risk of a significant price decline—to another party for a defined period.
It is critical to acknowledge that this insurance is not free. The cost of an options contract, its premium, is highly sensitive to market volatility.
In periods of high anxiety and price swings, such as during a gamma squeeze or a market correction, the demand for protection surges, and the cost of options (particularly puts) can become expensive.
Therefore, hedging is a strategic trade-off: the investor must weigh the cost of the protection against the potential magnitude of the loss being insured against. The very market conditions that make hedging most desirable also make it most costly.
Strategy Deep Dive 1: The Protective Put
The protective put is the most direct and fundamental options hedging strategy. It is conceptually equivalent to buying an insurance policy on a stock or an entire portfolio.
The strategy involves buying a put option on an asset that is already held in the portfolio, establishing a definitive “floor” price below which the position’s value cannot fall until the option’s expiration date.
Mechanics and Payoff Profile:
Setup:
The strategy is constructed by holding a long position in an asset (e.g., 100 shares of SPY) and simultaneously purchasing one put option contract on that same asset.
This is often referred to as a “married put” if the stock and put are purchased at the same time.
Maximum Loss:
The risk is strictly defined and limited. The maximum possible loss on the combined position is the difference between the price paid for the stock and the strike price of the put, plus the premium paid for the put option.
For example, if an investor owns a stock at $100 and buys a 90-strike put for $2, the maximum loss is ($100 – $90) + $2 = $12 per share. No matter how far the stock falls below $90, the investor can exercise the put and sell their shares for $90.
Maximum Gain:
The upside potential remains unlimited, though it is reduced by the cost of the put premium.
If the stock rallies, the put option will expire worthless, and the investor’s profit is simply the stock’s appreciation minus the initial cost of the hedge.
Advanced Implementation – Selecting Strike and Expiration:
The effectiveness of a protective put hinges on the careful selection of its strike price and expiration date. This choice involves a crucial trade-off between the degree of protection and the cost of that protection.
Strike Price Selection:
A strike price closer to the current stock price (at-the-money) provides a higher floor and protects against even minor downturns, but it will be significantly more expensive.
Conversely, a strike price further out-of-the-money is cheaper but only offers protection against a more substantial, catastrophic decline. The choice depends on the investor’s risk tolerance and the specific risk being hedged.
An investor worried about a moderate correction ahead of an earnings report might choose a strike 5% below the current price, while one seeking to insure against a true market crash might opt for a cheaper strike 15-20% below the current price.
Using Delta as a Guide:
The option’s delta can serve as a useful heuristic for this decision. Delta approximates the probability that an option will expire in-the-money.
A put option with a delta of -0.30 can be roughly interpreted as having a 30% chance of finishing in-the-money. A conservative investor might purchase a put with a delta of -0.40 or -0.50, paying a higher premium for a higher probability of the hedge paying off.
More cost-conscious investor might buy a “catastrophe insurance” put with a delta of -0.15 or -0.20.
Expiration Date Selection (DTE):
The time horizon of the hedge is also critical. Buying a put with a longer time to expiration (e.g., 90-180 DTE) provides protection for a longer period and benefits from slower time decay (theta).
However, this long-term insurance comes at a higher upfront cost. Buying shorter-dated puts (e.g., 30-60 DTE) is cheaper but exposes the investor to more rapid time decay and requires more active management, as the hedge will need to be “rolled” or replaced more frequently.
A common approach is to purchase puts with 30 to 90 days until expiration, striking a balance between cost, time decay, and the need for active management.
Strategy Deep Dive 2: The Collar Strategy
The collar strategy is a more sophisticated hedge designed to reduce or even eliminate the upfront cost of protection. It achieves this by combining a protective put with a covered call.
The investor who owns the underlying stock buys an out-of-the-money put to establish a protective floor, and simultaneously sells (writes) an out-of-the-money call to generate premium income. This income is then used to offset the cost of the put.
Mechanics and Payoff Profile:
Setup:
The strategy consists of three components: Long 100 shares of stock + Long 1 OTM Put Option + Short 1 OTM Call Option.
The Critical Trade-Off:
The primary benefit of the collar is the reduced cost of the hedge. If the premium received from selling the call perfectly matches the premium paid for the put, it is known as a “zero-cost collar”.
This benefit comes at a significant cost: the short call caps the upside profit potential of the stock. The investor gives up any gains above the strike price of the call they sold.
Maximum Loss:
The maximum loss is limited by the protective put, just as in the protective put strategy. It is calculated as the stock’s purchase price minus the put’s strike price, adjusted for any net premium paid or received for the options.
Maximum Gain:
The maximum gain is capped by the short call. It is calculated as the call’s strike price minus the stock’s purchase price, adjusted for any net premium paid or received.
When to Use a Collar:
The collar is an ideal strategy for an investor with a “cautiously bullish” or neutral short-term outlook on a stock they hold for the long term.
It is particularly well-suited for protecting large, unrealized gains in a mature position where the investor believes near-term upside is limited but wants to guard against a significant pullback.
It is generally not an appropriate strategy for a high-growth stock where the investor anticipates substantial further appreciation, as the capped upside would lead to significant opportunity cost.
| Feature | Protective Put | Collar |
| Market Outlook | Bullish with downside concerns | Cautiously Bullish / Neutral |
| Cost | Net Debit (cost to establish) | Low or Zero Cost (can be a net credit) |
| Upside Potential | Unlimited (reduced by premium paid) | Capped at the Short Call Strike |
| Downside Risk | Limited to (Stock Price – Strike) + Premium | Limited to (Stock Price – Strike) +/- Net Premium |
| Best Use Case | “Portfolio Insurance” against significant downturns while retaining full upside. | “Protecting Unrealized Gains” in a mature position with limited expected near-term upside. |
| Complexity | Moderate | High |
Advanced Management: The Art of the Roll
Establishing a hedge is not a one-time, “set it and forget it” decision. As the underlying stock price evolves and time passes, the hedge must be actively managed to remain effective.
This process of closing an existing options position and opening a new one with a different strike price or expiration date is known as “rolling” the position.
Rules for Managing a Dynamic Collar:
The collar strategy is particularly well-suited for dynamic management. The following are common adjustment scenarios:
If the Stock Rises (Approaching the Short Call):
If the stock rallies and approaches the strike price of the short call, the investor’s upside is about to be capped. To allow for further participation, they can “roll up and out.”
This involves buying back the current short call and selling a new call at a higher strike price and for a later expiration date. This action raises the profit ceiling on the position.
If the Stock Falls (Approaching the Long Put):
If the stock declines and approaches the strike of the long put, the hedge is working as intended.
The put option has increased in value. The investor can choose to “roll down and out” by selling the now-valuable put and using the proceeds to purchase a new put with a lower strike price and a later expiration.
This locks in some of the hedging gains while re-establishing protection at a new, lower level.
If Time Passes (Theta Decay):
As the options approach their expiration date (typically within 21-30 days), their time value decay (theta) accelerates, and the risk of assignment on the short call increases.
To maintain the hedge and avoid these expiration-related issues, the investor can roll the entire collar structure forward in time by closing the current options and opening new ones in a deferred expiration cycle.
A key principle in rolling defensive positions is to, whenever possible, execute the roll for a net credit, which further reduces the overall cost basis of the hedge.
The necessity for such explicit hedging strategies is a direct consequence of the market’s new microstructure.
The “volatility paradox”—characterized by long periods of suppressed volatility punctuated by sudden, violent, gamma-driven moves—means that traditional portfolio diversification may no longer be sufficient.
These new risks can affect an entire market index or its largest components simultaneously, causing correlations to converge toward one precisely when diversification is needed most.
The stabilizing flows that create calm on most days can lull an investor into a false sense of security, while the potential for an explosive unwind creates a “jump risk” that diversification alone cannot mitigate.
Therefore, the strategic purchase of “insurance” via puts and collars is evolving from a niche tactic for bearish speculators into a prudent risk management discipline for all long-term investors.
The premium paid for these hedges is the price of remaining safely invested through a market regime increasingly dominated by the powerful and unpredictable currents of intraday options flow.