Daily Options – Exchange-Traded Binaries

Options with zero days to expiration (0-DTE) are options that expire at the end of the trading day in which they were purchased. These options have a very short time to expiration, making them particularly volatile and risky for trading.

Trading 0-DTE options requires quick reactions and decision-making, as the price of options can fluctuate throughout the day depending on the fluctuations in the prices of underlying assets and other factors. Investors trading 0-DTE options typically have strategies aimed at short-term price changes and may use these options for hedging or speculating on short-term market movements.

Options are traded on option exchanges. The most well-known option exchanges in the United States are the Chicago Board Options Exchange (CBOE) and the New York Stock Exchange (NYSE), which provide platforms for trading various types of options, including options with different expiration dates.

0-DTE options can be traded on various financial instruments, including stocks, indices, futures, and ETFs (Exchange-Traded Funds).

• Stocks: Stock options are one of the most popular types of options. Trading stock options allows investors to benefit from fluctuations in the prices of individual companies.
• Indices: Index options provide an opportunity to invest in the broad market. This could be, for example, the S&P 500, NASDAQ, and others.
• Futures: Futures options allow trading on future prices of various commodities, such as oil, gold, metals, agricultural products, etc.
• ETFs: These are exchange-traded funds that represent a basket of stocks, bonds, or other assets. Options on ETFs allow investors to invest in different sectors and markets using a single instrument.

Two years after Wall Street’s romance with rapidly changing options began, the latest research shows that the unprecedented boom still has room to grow—even though nearly half of respondents fear a potential crash.

With the notional value of zero-day contracts reaching approximately $862 billion in April, nearly 90% of 300 respondents stated they expect continued growth in activity among short-term option use. Opinions are roughly divided on whether it will be stable growth or end in disaster.

Derivatives with maturities of less than 24 hours, known as 0-DTE, have become one of the most popular trades on Wall Street, as investors large and small seek to navigate uncertainty about the economy and central bank policy. 0-DTE trading accounted for 45% of the total options volume last year, roughly double the level before the products became widely available in the second quarter of 2022.

Exchanges make money by providing daily options. Volume has increased because more and more people have access to it. They will only become more common. The scale of the boom has sparked controversy. There are concerns that activity in ultra-short-term options could affect the volatility of various instruments, while studies show that retail investors using them mostly lose money.

Most survey participants demonstrated awareness of the latter risk, with 56% expressing the view that it is too easy to lose money with these tools. But concerns did not extend to restricting retail access to 0-DTE: 76% of respondents (nearly two-thirds of whom are professional investors) said it would be fair to leave them easily accessible.

Initially selected by high-frequency traders for making bets or hedging positions, zero-day options are gaining popularity among both experienced quantitative professionals and small investors. They have also found their way onto the exchange-traded fund arena.

Both academics and researchers on Wall Street note potential hazards associated with this trading wave, including the potential to make the market more volatile during the day. Strategies of some large funds warn that their popularity risks repeating past catastrophes, such as the 2018 “Volmageddon” episode, a famous explosion that ended a prolonged calm on U.S. stock markets. The theory is that a large movement in stocks will force options dealers, who take the other side of trades and must buy and sell instruments to maintain a neutral position in the market, to unwind much of their own positions, accelerating any sell-off.

The CME Exchange, at the center of the boom, claims that the wide range of uses for 0-DTE means that trades do not create overloaded one-sided bets that could make the market vulnerable to shocks. About two years ago, Cboe expanded the options expiration date to every business day.

As part of the latest expansion, CME said it plans to increase the number of short-term options on commodities and treasury ETFs.

Opinions on the impact of 0-DTE on the underlying market are fairly evenly divided. Only about a quarter of respondents said they were very concerned about this, with 34% not concerned at all, and 41% only slightly concerned.

When asked how they would describe 0-DTE, participants, mostly based in the U.S. or Europe, often responded sharply. “Gambling” was the most common phrase. Negative descriptions included “Vegas slot machine,” “atomic bombs,” and “instruments that shift wealth from retail trading and simple institutions to exchanges and market makers.”

Positive participants mainly focused on their usefulness as a hedging tool. As one participant said, “It’s a pretty inexpensive way for investors to take a position on directional movement of an instrument without needing to own the underlying assets.”

In summary, 0-DTE options make it easy to lose money.

BT