Notes · Aug 14, 2026
Morgan Stanley's top US economist reveals the 2 risks that could
Educational only. Not investment advice. Not a trade recommendation.
A Shift in the Inflation Narrative: How Dealer Positioning May Adapt
Morgan Stanley's top US economist has identified two key risks that could challenge the Fed's inflation strategy, potentially leading to a shift in market expectations and dealer positioning. If the market starts to price in a higher likelihood of the Fed being forced to re-evaluate its stance, we can expect a ripple effect through the options market, particularly in the 0DTE space.
In a scenario where the market is pricing in a potential Fed pivot, dealers may adjust their gamma exposure to account for the increased uncertainty. This could manifest as a shift in the gamma flip level, with dealers more likely to hedge their positions above a call wall or below a put wall. For example, if SPY is pinned just under a call wall, a dealer may be more inclined to sell calls above the wall to offset their delta, potentially creating a gamma flip below the wall.
Understanding the Role of Dealer Positioning in 0DTE Options
Dealer positioning plays a crucial role in shaping the 0DTE options market, particularly in terms of gamma exposure and hedging activity. As the Confluence Flow Index (CFI) indicates, dealers are constantly adjusting their positions to manage risk and maintain a delta-neutral stance. In a market where inflation expectations are shifting, dealers may need to adapt their positioning to account for the changing landscape. For more information on how to interpret the CFI and its implications for 0DTE options, see our educational resources on dealer hedging and gamma exposure.
Expected Move and Vol Regime: Key Considerations
The expected move and vol regime are critical components of the 0DTE options market, and a shift in inflation expectations could have significant implications for both. If the market starts to price in a higher level of uncertainty, we can expect the expected move to increase, potentially leading to a more volatile trading environment. In terms of vol regime, a shift towards a more volatile environment could lead to a increase in the vol surface, making it more expensive to buy options. The following table illustrates the potential impact of a shift in inflation expectations on the expected move and vol regime:
| Scenario | Expected Move | Vol Regime |
|---|---|---|
| No change in inflation expectations | Stable | Low |
| Shift in inflation expectations | Increasing | Rising |
Session Behavior and the Impact of Inflation Expectations
The impact of a shift in inflation expectations on session behavior will depend on a variety of factors, including the magnitude of the shift and the market's overall sentiment. If the market is pricing in a significant increase in inflation, we can expect a more volatile trading environment, potentially leading to a increase in the number of gamma flips and a more pronounced impact from dealer hedging activity. In terms of specific levels, a call wall above the current price may become more significant, as dealers look to hedge their positions and manage risk.
- A shift in inflation expectations could lead to a change in session behavior, with a more volatile trading environment potentially emerging.
- Dealer positioning and hedging activity may become more pronounced, particularly around key levels such as call and put walls.
- The expected move and vol regime may also be impacted, with an increase in uncertainty potentially leading to a more expensive options market.
Practical Takeaways and Next Steps
In conclusion, a shift in inflation expectations could have significant implications for the 0DTE options market, particularly in terms of dealer positioning and the expected move. By understanding the key considerations and potential impacts, traders can better navigate the market and make more informed decisions. Two key takeaways from this analysis are: first, the importance of monitoring dealer positioning and hedging activity, particularly around key levels such as call and put walls; and second, the need to adapt to changing market conditions, including shifts in inflation expectations and the resulting impact on the expected move and vol regime. As you continue to trade 0DTE options, consider delving deeper into the mechanics of dealer positioning and hedging activity, and how they can inform your trading decisions.
Where to go next
Read how graded alerts work, see the public scanner stats, or open the Decision Desk. Plans start at $49/mo — subscribe.
Educational content only. Options involve substantial risk.