Zero-day-to-expiration options are not for the faint of heart, but their popularity has still exploded recently, raising concerns about excessive volatility in the market. According to JPMorgan data, the daily notional volume of these 0DTE options, which track the S&P 500 index, exploded and hit a record $1 trillion. Marko Kolanovic, the top strategist at JPMorgan, warns of the risk of “Volmageddon 2.0” if activity continues to accelerate. Meanwhile, Goldman Sachs’ trading desk called the record volume in these volatile contracts “staggering.” What are 0DTE options? An option is a contract that gives its holder the right, but not the obligation, to buy or sell a specified quantity of an underlying asset at an agreed price, called the strike price, and on a specified date. Zero-day-to-expiration options are contracts that expire on the same day they are traded. With the expiration date approaching, 0DTE options are often tied to highly liquid assets such as the SPDR S&P 500 ETF (SPY) and other popular stocks and ETFs. So-called 0DTE contracts accounted for more than 40% of the S&P 500’s total options volume as of the end of September, according to Goldman data, and have nearly doubled from six months ago. How to benefit from 0DTE options? 0DTE options give traders the ability to quickly capitalize on positions, especially when there is a catalyst moving prices. Options with such a short lifespan often carry a very low premium for buyers. For example, an investor buys 0DTE call options on a stock hoping that an earnings report will be better than expected. It turns out the company crushes expectations and the stock explodes. The stock price goes up and so does the price of the option contract. The investor could hold the contract until the expiration date and receive the 100 stock shares. Alternatively, he can sell the option contract before the expiry date at the market price of the contract to recoup the difference. “Manufacturing Demand” On the other side of this trade, the parties receiving the premium – typically market makers – need to hedge their position by buying the underlying asset. As these options become popular, their hedging would also increase. “If there is a large movement when these options come in the money and sellers cannot support these positions, forced coverage would lead to very large directional flows,” Kolanovic said in a note. “These flows could have a particular impact on markets given the current low-liquidity environment.” Ivory Johnson, a financial adviser at Delancey Wealth Management, said he suspects 0DTE options create demand for stocks and contribute to wild intraday swings in the broader market. “The concern is that if volatility explodes, it may facilitate that,” Johnson said in an interview. “Especially if they’re doing it on the downside and then all of a sudden they get more selling pressure, it’s just going to cause more and more hedging. So the more people do the same thing, the more volatility can explode. “
