Quiver Quantitative - The burgeoning trend of zero-day options (0DTE) is gaining traction among Wall Street's quantitative investment strategists (QIS), with major banks like Citigroup (C), JPMorgan (JPM), and UBS Group (UBS) incorporating them into their systematic equity products. These derivative contracts, which expire within 24 hours, have become popular for their ability to offer low-cost bets on volatility and portfolio diversification. Banks are responding to market changes by rapidly developing products that incorporate 0DTEs, reflecting their growing acceptance and versatility in trading strategies.
At Citigroup, Michele Cancelli and Guillaume Flamarion have been pioneering the use of 0DTEs in volatility-related products. These include strategies that hedge downside, harvest premiums, and enhance relative-value trades. The minimal risk associated with 0DTEs, due to their short lifespan, allows for more controlled exposure to market movements. JPMorgan has also updated its intraday momentum trades by adding zero-day options, previously relying solely on index futures.
Market Overview: -Quantitative investment teams at major banks embrace Zero-Day Options (0DTEs) in new strategies. -Bespoke products for volatility hedging, portfolio diversification, and daily momentum capture gain traction. -Concerns about market stability ease as trading volumes spread, attracting diverse user types.
Key Points: -Citi, JPMorgan, and UBS actively incorporate 0DTEs into QIS offerings, appealing to risk management needs. -Lower overnight exposure and daily trade execution offer advantages over traditional options. -Short-volatility plays and income generation through out-of-money puts drive demand from hedge funds and institutions. -BNP Paribas highlights intraday position management as key challenge in 0DTE strategies.
Looking Ahead: -Wider adoption of 0DTEs by quants expected across regions and asset classes. -Innovation in 0DTE-linked trade structures likely to intensify competition among investment banks. -Focus on mitigating risks and ensuring portfolio diversification remains crucial for successful implementation.
The proliferation of 0DTEs has spurred concerns about market stability, reminiscent of past crises like the 2018 Volmageddon. However, as trading diversifies across different strategies, the risk of market imbalance decreases. These options, initially designed for the volatile market conditions of 2023, have found widespread appeal due to their affordability and ability to leverage small investments into significant market positions.
Banks like UBS and BNP Paribas (OTC:BNPQY) SA have also incorporated 0DTEs into their QIS trades, particularly in short-volatility strategies. These products have attracted a diverse clientele, from hedge funds to pension funds, due to their unique risk profiles and ability to diversify portfolios. As the zero-day options market continues to evolve, quants are expected to keep developing innovative strategies to capitalize on this trend, indicating that the competition in this new market segment is just beginning.
This article was originally published on Quiver Quantitative