Be on Your Guard: 7DTE Options Markets and Safety Related Small Maturity Phenomena in Bond and Stock Markets
63 Pages Posted: 10 Dec 2024
Date Written: March 05, 2024
Abstract
To analyze small maturity phenomena related to safety in stock and bond markets, we develop a model to explain observable patterns: a positive correlation between the returns of 7DTE out-of-the-money (OTM) Treasury bond futures calls and S&P 500 stock puts, no correlation between the returns of 7DTE OTM bond puts and stock calls, and a decrease in the VVIX/VIX ratio during times of market stress. The estimated model is based on a theory of bivariate jump distributions for the bond's upside (downside) and the stock's downside (upside) and is validated empirically by 7DTE findings that encompass 22 variables.
Keywords: Matched weekly (7DTE) options on S&P 500 index and 7DTE options on Treasury bond futures, bivariate jump distributions, stochastic jump intensity rates, estimated models
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