Receive free S&P 500 updates
We’ll send you a myFT Daily Digest email every morning with the latest S&P 500 news.
The market for ultra-short-term options on US stock market moves has been booming in recent weeks, prompting analyst fears that daily bouts of activity could lead to sharp sell-offs in stock markets.
So-called zero-day options, which allow traders to take targeted positions in stock markets around events such as economic data releases or monetary policy meetings, have grown in popularity since the start of the coronavirus pandemic.
According to data from Cboe Global Markets, zero-day options on Wall Street’s S&P 500 index now account for 43 percent of total S&P 500 options volume, down from just 6 percent in 2017.
Analysts say demand for zero-day contracts has continued to rise over the past three weeks as financial markets have become more volatile. Last week, global bond yields soared to multi-year highs as investors adjusted their expectations that central banks could start cutting interest rates soon.
According to Nomura, four of the 10 best days of all time for S&P 500 zero-day option buying fell in August, during which time the U.S. benchmark index fell more than 4 percent. As a percentage of total daily S&P 500 options, zero-day options accounted for 55 percent twice in the week ended August 11, an all-time high.
Some analysts say the popularity of the options amid low liquidity over the summer is now causing price volatility in the benchmark index itself. They fear a repeat of the 2018 “Volmageddon” event, where a spike in trading volatility sent several short-volatility exchange-traded funds crashing brought.
Goldman Sachs indicated Tuesday that tens of thousands of bearish zero-day put option orders totaling $45 billion had forced market makers who need to manage their exposure to buy protection. That pushed them out of stocks, forcing the S&P 500 down 0.4 percent in just 20 minutes, Goldman said.
Record-breaking zero-day option purchases have “clearly contributed to the intraday volatility we’re seeing.” [month to date] So far,” said Charlie McElligott, equity derivatives strategist at Nomura. Their over-stake increases the likelihood that a 1 percent sell-off will result in a 3 percent drop, he added.
But Cboe Global Markets, the world’s largest options exchange, disputes the view that the contracts exacerbate intraday volatility.
“Order flow is remarkably balanced between buys and sells, users are diverse, and use cases are diverse,” said Mandy Xu, head of derivatives market research at Cboe.
Recommended
“People use these products for hedging, tactical trading, systemic strategies and returns enhancement,” she said. “If the volume is evenly balanced, as it is in the vast majority of cases, it would have no impact on market volatility.”
Research from JPMorgan suggests that institutional investors, including hedge funds and asset managers, account for the majority of demand. Private traders are also dabbling in the market – Reddit’s popular Wall Street Bets forum is full of comments from day traders saying they’ve made big or lost thousands of dollars using zero-day options strategies.
A self-proclaimed “degenerate gambler” reportedly made $32,000 on Wednesday alone, despite admitting that his tactic of buying bullish zero-day call options after a market decline was high risk: “Wouldn’t recommend it.”
Comments are closed.