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Wall Street Clings to High-Octane Options Trading Amid Market Jitters


Benjamin Hughes

May 6, 2024 - 00:22 am


Wall Street's High-Stakes Options Trading Craze Shows No Signs of Slowing Down

(Bloomberg) -- The appetite for high-velocity stock options trading that captured Wall Street's fancy two years ago doesn't appear to be waning, as suggested by the results from the latest Markets Live Pulse survey by Bloomberg. Despite concerns expressed by nearly half of the survey's respondents about the possibility of a catastrophic market event, the bustling trade of zero-days-to-expiration (0DTE) options continues to surge, with projections of ongoing growth.

According to data evidenced in April, the notional value of 0DTE contracts associated with the S&P 500 has skyrocketed, touching an estimated $862 billion. This prodigious sum led to a striking consensus among the majority of the 300 MLIV Pulse respondents, who acknowledged the upswing has legs, albeit with a divided opinion on whether the trend will remain steady or spiral into disorder.

Showing remarkable penetration into the trading realm, equity derivatives with a lifespan of fewer than 24 hours, or 0DTE options, are increasingly patronized. They’ve become a darling among both institutional and retail investors, seeking to tactfully swim through the unpredictable tides of economic shifts and altering central bank policies. Last year alone, trading in 0DTE options made up about 45% of all S&P 500 options volumes, more than doubling in prevalence since they broadly hit the markets in the latter half of the previous year.

The Growing Accessibility of Daily Options

Phil Pecsok, the chief investment officer at Anacapa Advisors, elucidated the rationale behind the burgeoning volumes: "The exchanges are benefiting immensely by sanctioning daily options. The volumes have intensified as availability becomes widespread. Their prevalence is poised to only accelerate from here."

However, the explosion in trading volumes isn't being celebrated by all. Warning bells are tolling over the potential distorting effects this could have on stock volatility, with several studies indicating that retail investors dabbling in 0DTE options often find themselves on the losing end. Despite this sobering insight, a majority of survey participants, of which 56% were concerned about the ease of financial loss with these instruments, were not in favor of restricting the availability of 0DTE to the retail market. A strong 76% believed it was just to keep them widely accessible, with a notable two-thirds being professional investors.

The Broadening Influence of Zero-Day Options

Initially cornered by high-frequency traders for making speculative plays or hedging strategies, zero-day options are now appealing to a broader spectrum of the financial community. Quant professionals and small-scale investors are among the fresh entrants to the market, with these options also carving out a space within the exchange-traded funds (ETFs) sphere.

The pervasiveness of these derivatives has caught the attention of academics and Wall Street researchers alike, prompting discussions on the potential hazards they carry. A possibility looming over these trades is their alleged role in heightening market volatility, particularly on an intraday level. A severe market shock, as JPMorgan Chase & Co. strategist Marko Kolanovic warns, could mirror distressing historical market routs — reminiscent of the 2018 Volmageddon incident which disrupted a long-standing market equilibrium. The prevailing theory is that a sizeable stock movement could compel options dealers to abruptly de-risk, thereby accelerating a market downturn.

Exchange Innovations in Options Trading

Cboe Global Markets Inc., the exchange central to this vigorous activity, contends that due to the varied applications of 0DTE, these trades don't foster the type of one-sided speculative frenzy that typically predisposes the market to shocks. Approximately two years ago, Cboe broadened the expiration options for the S&P 500 to inclusive of every working day. Further, they extended the availability to cover the Russell 2000 Index.

Nasdaq Inc. hasn't been a bystander in this evolving market landscape, announcing intentions to enhance the offering of short-term options on commodities and Treasury ETFs, potentially fueling greater market engagement.

Divided Sentiments Among Market Participants

The MLIV survey illuminated a schism in perceptions regarding the impact of 0DTE options on the market. Only about a quarter of the respondents harbored acute concerns, alongside a third who weren't worried. Slightly over 40% remained cautiously anxious about the implications.

In describing their sentiments about 0DTE options, responses varied from critical to supportive. Terms like "Gambling" and metaphors such as "a slot machine in Vegas" surfaced frequently, alongside more dire descriptions like "atom bombs" and "tools resulting in a wealth transfer from retail and unsophisticated institutions to exchanges and market makers." However, not all were disparaging: some respondents highlighted the objects as cost-effective hedging alternatives, allowing investors to engage in directional moves of stocks without direct ownership.

As for the future of zero-day options, particularly the possibility of extending them to single stocks, opinions were sharply divided. The MLIV respondents seemed evenly split over the potential broadening of such a dynamic market play.

MLIV Pulse: Assessing Reader Insights

The MLIV Pulse survey serves as a platform conducted among Bloomberg terminal and online readers. Orchestrated by Bloomberg's Markets Live team, the survey complements the MLIV blog in harnessing reader perspectives on prevailing market scenarios. This week the survey seeks to unfold opinions on whether Bitcoin or large cap US tech stocks provide a safe haven in volatile times. Readers are encouraged to participate and share their views here.

The in-depth "Markets Live Pulse survey April 29- May 3” provides insights into the current sentiment and future outlook of trading behaviors, particularly the enthralling world of fast-expiring stock options. With a foundation of 300 respondents' perspectives, the survey rolls out a nuanced view into the nerves and narratives of market fluctuations.

Markets Live Pulse survey

©2024 Bloomberg L.P.

In concluding observations, the alluring yet precarious nature of 0DTE options trading seems to echo the old adage: high risk for high reward. Wall Street’s continued embrace of these swift derivatives reaffirms a commitment to sophisticated, though potentially precarious, financial instruments in an everlasting pursuit of market edge. What remains apparent is the resolute stance of the financial community to navigate, and perhaps flourish, in the fluid dynamics of an ever-evolving trading environment, keeping a keen eye on the horizon for any signs of the volatility or regulatory shifts that may sway the balance.

It is the vigor and the volatile nature of today's financial markets, symbolized by the relentless trading of 0DTE options, that will continue to shape discussions and decisions around market regulation, investor safeguarding, and the ethical boundaries of financial innovation. Whether these options will ultimately lead to a vast redistribution of wealth or serve as ingenious instruments of risk management, only time will tell. But for now, it seems Wall Street's fascination and strategic engagement with 0DTE options are far from peaking.