The stock market is a constantly evolving and dynamic place. With each passing year, new strategies and techniques are developed that allow investors to capitalize on its every move. One such method that has gained popularity in recent times is the use of 0DTE (zero-day to expiration) options to generate quick profits from short-term price fluctuations.

However, with the increased adoption of these options, some experts are concerned that we may be headed for another “Volmageddon.” If you’re not familiar with the term, Volmageddon is the name given to the market upheaval that occurred on February 5th, 2018, when the VIX (CBOE Volatility Index) suddenly surged, leading to a significant drop in the value of popular measures of short-term implied volatility such as the SVIX, as well as volatility-related ETFs and ETPs.

The cause of this sudden rise in volatility was a complicated story. Essentially, the market experienced a short squeeze into a limit stop order, which caused a dramatic turn in the VIX futures. In the end, the VIX futures went from being up 20% on the day to up a whopping 120%. This event sent shockwaves throughout the financial world, and many investors who were caught off guard experienced significant losses.

As someone who was managing a book of long VIX futures contracts for a client who was short SPX vol at the time, I can tell you that Volmageddon was one of the most unpredictable and tumultuous days in the history of the stock market. Even as an experienced investor who had seen their fair share of market fluctuations, this was different. The scale of the market’s movement on that day was enormous, and it was a reminder that anything could happen at any time, regardless of how well you think you’ve prepared.

One of the reasons why many experts are worried about a potential Volmageddon 2.0 is that the increased popularity of 0DTE options could lead to an over-crowded trade. If the market experiences an unexpected move, then these options may lack the necessary liquidity to handle it, resulting in significant losses for investors. Many fear that the widespread adoption of 0DTE options has created a market that is more fragile than ever before.

In the aftermath of Volmageddon, many investors were left to deal with the consequences. The UVXY, a popular ETF used to short the VIX, experienced a dramatic rise, and those who were short suffered substantial losses. Other ETFs and ETPs, such as XIV and SVXY, also lost a significant amount of their value. This event served as a wake-up call for many traders and investors, who realized the importance of managing risk, diversifying portfolios, and being prepared for the unexpected.

The lesson from Volmageddon is clear – be cautious, be prepared, and always keep an eye on the market. It’s essential to stay vigilant and aware of potential risks and market movements, even when using seemingly safe and reliable strategies like 0DTE options. While the use of these options can be an effective way to generate profits from short-term price movements, it’s crucial to be aware of their limitations and the potential risks associated with their widespread adoption.

In summary, the stock market is an ever-changing landscape, and the strategies that worked yesterday may not work tomorrow. We must always be on the lookout for potential risks, diversify our portfolios, and be prepared for the unexpected. Volmageddon was a painful reminder of this fact, and we must learn from it if we hope to be successful investors in the long term.