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Is the Rise of 0DTE Options Fueling Market Volatility?

Published 06/03/2023, 14:27
  • Equity markets in Europe, the US, and Asia had a positive week, with S&P 500 and Nasdaq performing well.
  • 0DTE options, which are cheap and offer a way to bet on short-term volatility, have sparked debate on their impact on market volatility.
  • Meanwhile, investor sentiment remains bearish and above the historical average.
  • The week was positive for European, US, and Asian equity markets. The S&P 500 rallied to end a three-week losing streak. The Nasdaq had its best day since early February.

    The turning point came on Thursday when Raphael Bostic of the Atlanta Fed said the bank might pause on rate hikes sometime this summer.

    Many factors or elements contribute to increased volatility in financial markets. The extent or intensity of that volatility depends on how many of these elements are present and how strongly they interact.

    But today, I want to talk to you about one element that is being discussed a lot on Wall Street in terms of its impact on market volatility. We are talking about 0DTE options.

    These options have the peculiarity of expiring daily, every working day, from Monday to Friday. Hence the name 0DTE (0 days to expiration).

    The usual mechanism is to open a trade at the start of the day's session, leave it open for x time, and close it before the session closes.

    Although most commonly used by institutional investors, this investment is also becoming quite popular with some retail investors. Both demand and interest continue to grow, so the volume of these options is also increasing.

    One of their attractions is that they are cheap. Contracts with less time to maturity tend to have a lower value. This makes them a cheap way to bet on the short-term volatility of the underlying asset.

    There is a heated debate on Wall Street about whether these types of options can or do have a bearing on market volatility.

    So far this year, the S&P 500 has had 11 days in which it rose by 1% or more and eight days in which it fell by 1% or more, a total of 19 days out of 42. In other words, 45% of all sessions in 2023 have seen the S&P 500 move more than 1% up or down almost half the time. That is a lot.

    But let's go back to the number of sessions with declines of 1% or more. We are now at 8. Last year, there were 63 sessions, the highest negative volatility since 2008 when there were 75 sessions.

    With this forecast, we would be talking about 48-50 sessions this year, which would mean overcoming 80 years, i.e., in the last 95 years, we have only seen something similar 15 times.

    The Ideal Purchases

    February has ended, a historically bad month for the stock markets, with an average fall of -0.05% for the S&P 500 since 1950, and the second worst month of the year after September with -0.47%. This time around, February was even worse than the historical average, with a decline of -2.4%.

    But some companies did very well in the month, such as Nvidia (NASDAQ:NVDA) with a gain of +20% and Tesla (NASDAQ:TSLA) with similar figures. If we could travel back in time, we might consider buying Warner Bros. Discovery (NASDAQ:WBD) in January, up 56.3%, and Catalent (NYSE:CTLT) in February, up 25.6%.

    Investor Sentiment (AAII)

    Bullish sentiment, or expectations that stock prices will rise in the next six months, rose 1.8 percentage points to 23.4%. This is still below its historical average of 37.5%.

    Bearish sentiment, defined as those expecting stock prices to fall over the next six months, increased by 6.2 points to 44.8%, its highest level since December 29 (47.6%). It is also above its historical average of 31%.


    A green week for all markets, with the IBEX 35 up 2.85%, the DAX 2.42%, the FTSE 100 0.87%, the Nikkei 1.73%, the Shanghai Shenzhen CSI 300 1.71%, the Euro Stoxx 50 2.78%, the CAC 40 2.24%, the FTSE MIB 3.11%, the Nasdaq 2.58%, the S&P 500 1.90% and the Dow Jones Industrial Average 1.75%.

    The year-to-date ranking of the main European and US stock exchanges is as follows:

    • Italian Mib +17.67%.
    • Spanish Ibex +14.86%.
    • French Cac +13.61%.
    • Euro Stoxx 50 +13.3%.
    • German Dax +11.88%.
    • Nasdaq +11.68%.
    • Nikkei +8.21%.
    • Chinese CSI 300 +6.14%.
    • British FTSE +6.06%
    • S&P 500 +5.37%
    • Dow Jones +0.73%


    Disclosure: The author does not own any of the securities mentioned.

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