0DTE Options Surge, Splitting Market Opinion on Risk

Key Takeaway

• Zero-day options trading, making up 45% of S&P 500 options volume, is expected to grow despite nearly half fearing a market blowup.
• Concerns over increased stock volatility and retail investor losses contrast with the view that 0DTE should remain accessible.
• Cboe's expansion of zero-day options and potential broadening to single stocks highlight the market's evolving dynamics.

Zero-Day Options Surge Continues

The notional value of zero-days-to-expiration (0DTE) contracts tied to the S&P 500 soared to approximately $862 billion in April, signaling a robust continuation of Wall Street's engagement with these fast-paced financial instruments. Despite the surge, a Bloomberg Markets Live Pulse survey of 300 respondents reveals a divided sentiment: nearly half anticipate a steady growth, while the rest foresee a potential market blowup. This dichotomy underscores the speculative nature of 0DTE options, which have doubled in total options volume for the S&P 500 last year, capturing 45% of the market.

The Debate Over 0DTE Impact

Phil Pecsok, chief investment officer of Anacapa Advisors, highlights the profitability of exchanges from the rising volume of daily options, suggesting their prevalence is only set to increase. However, concerns loom over the influence of 0DTE options on stock volatility and the predominance of losses among retail investors engaging in these trades. Despite these apprehensions, a significant 76% of survey participants, primarily professional investors, advocate for maintaining retail access to 0DTE options, citing fairness.

Market Sentiments and Risks

The popularity of 0DTE options among both high-frequency traders and retail investors has prompted warnings from Wall Street researchers about potential market volatility and the risk of events similar to the 2018 Volmageddon. Yet, the Cboe Global Markets Inc., a central exchange for 0DTE trading, argues that the diverse applications of these options mitigate the risk of market shocks. This perspective is somewhat reflected in the survey results, with opinions on the impact of 0DTE on the underlying market being split.

Street Views

• Phil Pecsok, Anacapa Advisors (Neutral on 0DTE options):

  "The exchanges are making money hand over fist by allowing daily options. As you’ve seen, the volume has gone up because more and more people have access to it... They’re only going to become more prevalent."