Summary:
Fast-expiring options known as zero-day contracts, specifically those tied to the S&P 500 with a maturity of less than 24 hours, have witnessed a significant uptick in trading activity. Recent data from Nomura Securities (NMR) indicates that about 1.86 million such contracts were traded on a single day, accounting for a record-breaking 55% of the index’s total volume. This increase in 0DTE trading has occurred in tandem with considerable intraday swings in the stock market.
Charlie McElligott of Nomura notes a shift in trading behavior, emphasizing the market's conducive environment for 0DTE trading. The popularity of these quick expiry options also correlates with significant economic events, such as monthly payroll reports or the release of the consumer price index. Traders leverage these low-cost options, particularly during significant data releases, to make quick speculative bets, as noted by Stuart Kaiser of Citigroup Inc (NYSE:C).
Interestingly, a trend has emerged among options traders. Previously dominated by calls, the last 20 days have seen a preference shift towards bearish options, with puts surpassing calls by roughly 10%. The broader implication of this rising trend in zero-day options trading is the subject of Wall Street debate. Some argue that it could influence or potentially destabilize the vast American equity landscape, valued at $47 trillion.
The market dynamics are also influenced by market makers practicing gamma hedging. As they strive to maintain a market-neutral stance, their actions can exaggerate market trends, especially when many options are initiated. Such effects were evident last Friday when a significant number of at-the-money puts became profitable. As these were closed by day's end, the S&P 500 rebounded from its session low, a phenomenon McElligott attributes to the influence of 0DTE options.
This article was originally published on Quiver Quantitative