There’s an invisible force driving the most popular options trade of the year — one that gives Wall Street pros and day traders alike the power to turn a $1 investment into a $1,000 stock bet.
Investors are wagering on the daily gyrations of American equity benchmarks by dashing in and out of trading contracts that expire within 24 hours — known by the “0DTE” moniker — with less upfront capital than meets the eye. The hidden fuel for the frenzy: Quirks in the ecosystem of the derivatives marketplace that makes these zero-days-to-expiry options look cheap.
The best way to observe the phenomenon is in the difference between how much investors are actually spending on 0DTE and the notional value of those options — that is, how much exposure they are getting to the underlying asset via the contracts.
On the latter, the notional trading volume of 0DTE for the S&P 500 currently averages a beefy $516 billion a day, according to data compiled by Cboe Global Markets. Yet the actual amount of money paid out for them, or the premium, is only $520 million.
Put another way, traders are getting $1,000 of stock exposure for every dollar they spend on 0DTE. They would need to spend 10 times that to get the same equity position using derivatives with a longer lifespan, a Bloomberg analysis on Cboe’s data shows.
“They are the fantasy football of option trading,” said Dennis Davitt, co-manager of the MDP Low Volatility Fund. “You spend a dollar and you see if it goes your way. Then you’re done at the end of the day.”
No wonder these zero-day options are fast becoming a popular tool for retail investors to speculate en masse — sparking concerns among the likes of JPMorgan Chase & Co. that the strategy risks fueling volatility in the broader marketplace.
Buyers in the trade are effectively paying $1 to control $1,000 of shares, and the price movement from these shares determines their returns, typically in an amplified manner. They can lose all the $1 investment or pocket handsome profits.
The outsized leverage in the trade stems from the way derivatives are calculated. The less time a contract has left to maturity, the less time there is for the underlying asset to move favorably, so its premium is generally lower.
It’s like property insurance, where home owners are usually charged less for six-month coverage than for three years simply because hazards are less likely to occur over a shorter period of time. The six-month package looks less expensive on paper, though it isn’t necessarily a better deal.
On March 22, for example, when the Federal Reserve was about to announce its monetary policy in the afternoon, the S&P 500 opened at about 4,002. At that time, an at-the-money put — a protective contract where the strike price is essentially the same as where the index is actually trading — cost about $26 for an expiry in the same session. A similar contract maturing two days later could be bought for roughly $37 — or 42% more than the 0DTE.
“There are very meticulous use cases for 0DTE options that did not exist previously,” said Jonathan Zaionz, senior derivatives analyst at Cboe. “Since people are taking shorter term views and/or hedging with 0DTE, they don’t need to pay as much in time premium compared to longer term strategies.”
Weighing the risks and benefits of 0DTE trading has become a pastime for Wall Street since exchanges expanded index option expiration to every weekday last year, sparking the surge in activity.
To the 0DTE faithful, the very fact that the sum of capital at stake is far less than what’s suggested by the headline volume points to the lower likelihood that wrong-footed positioning could unleash a wave of volatility.
While the notional volume of 0DTE now represents 44% of all options-related trading on the S&P 500, per Cboe data, the amount of money charged for them accounts for just 7% of the total outlay for contracts tied to the index.
Count Kieran Diamond in UBS Group AG’s volatility strategy team among those who say worries over 0DTE’s potential threat to destabilize the equity market are overblown.
Fueling the trading boom is the proliferation of multi-leg strategies, those that layer puts or calls as part of a systematic trade. While the notional volume involved is huge, Diamond sees these compound trades posing limited risk as they typically sell one option and then buy back a further out-of-the-money option — largely offsetting each other in terms of market impact.
“Talking in headline notional numbers is an oversimplified approach when you are looking at such short-dated options,” said Diamond.
Regardless, to the likes of Rocky Fishman, the small investment on top of the frenzied trading is a sign that zero-day options are largely a gadget of stock speculation pure and simple.
“There is huge trading volume in these mini-probability trades,” said the founder of derivatives analytical firm Asym 500. “That’s not the only thing happening in 0DTE but it’s probably the biggest thing.”
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