By Proxima Studio @

In Bloomberg, Lu Wang discusses the growing use of 0DTE options and their potential to cause market volatility, writing:

Discovered by retail investors as a cheap way of gambling during the meme-stock era in 2021, zero-day options got a fresh boost on index trading after firms like Cboe Global Markets Inc. last year expanded S&P 500 options expirations to cover each weekday. The offerings became an instant hit among institutions as daily reversals ruled the market, spurred by the Federal Reserve’s most aggressive monetary tightening in decades.

By the third quarter of 2022, 0DTE contracts accounted for more than 40% of the S&P 500’s total options volume, almost doubling from six months earlier, data compiled by Goldman Sachs Group Inc. show.

Behind the explosive rise, according to JPMorgan, are likely high-frequency traders — the computer-driven firms present at virtually every node of the modern equity landscape — as market makers and fast-moving seekers of an investing edge.

It’s a match made in quantitative heaven: For firms known to measure the life cycle of trades in thousandths of a second, zero-day options hold obvious benefits as tools to balance exposure and otherwise hone strategies designed to harvest fleeting profits by darting in and out of positions.

That very success sows the seed for trouble, according to Kolanovic, who is a top-ranked derivatives strategist at JPMorgan. In his view, the risk centers on market makers, who take the other side of trades and must buy and sell stocks to keep a market-neutral stance. The fear is a self-reinforcing downward spiral that rocks the entire market, creating an event risk similar to 2018’s volatility implosion.

But Bank of America Corp. strategists have quickly pushed back on the theory, arguing today’s market is much more balanced than five years ago, when everyone was betting on a decline in volatility that left the market vulnerable to a drastic reversal.

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