FX: Doomsday options trading volume surges to record levels

It may not be a coincidence that the boom in ultra-short-term options trading is reaching unprecedented heights amid the recent intraday volatility in the stock market.

According to data compiled by Nomura Securities International,About 1.86 million so-called zero-day expiration options (0DTEs, also known as doomsday options) changed hands last Thursday, accounting for 55% of the total S & P 500 index-linked options, a record high0DTEs are options contracts that expire and expire on the day of trading, meaning that options have less than 24 hours left to expire

The rapid popularity of 0DTE has coincided with a shift in the market backdrop. Over the past two weeks, S & P 500 futures have erased at least 0.9% of their gains on different trading days, undermining the index's upward momentum of 28% in 10 months.

Charlie McElligott, cross-asset strategist at Nomura, said the intraday sell-off "drove the change in the 0DTE space, unlike what we saw during the equity rally. For volatile, range-bound or overshoot environments, 0DTE trading is the perfect tool. But at the same time, it alsoFueled such market volatility.

The periods with the highest volume of 0DTE trading usually occur when major economic data are released: such as the monthly employment data on August 4 and the consumer price index on August 10. According to Stuart Kaiser, head of US equity trading strategy at Citigroup, traders may have used low-cost options to position around these events.

It is also worth noting that the types of options favored by traders have also shifted.From bullish to bearishAccording to KaiZehuiOver the past 20 days, the number of 0DTE recognized contracts has exceeded the number of subscription contracts by nearly 10%. This is different from the previous two months, when trading was mainly bullish.

"You could argue that 0DTE is tactically an alternative to stock futures trading because of the low implied volatility," he said.

How derivatives interact with their underlying assets is a subject of widespread academic interest. Since last year, the 0DTE boom has sparked a heated debate on Wall Street over whether the popular trading instrument has the potential to influence or even disrupt the $47 trillion U.S. stock market landscape.

McElligott observed that the market has recently experienced greater intraday volatility, with gains or losses often reversed in some way, ironically.This resulted in a more moderate price action towards the closeLast week, for example, the S & P 500 averaged 0.9 per cent, 2.2 times the daily closing range

The surge in 0DTE trading may have contributed to this volatility. Driving this dynamic are market makers, who are the other side of options trading and need to buy and sell stocks to maintain a neutral stance, a process known as gamma hedging. More recently, they have switched to "short gamma", a stance that forces them to conform to current market trends and sell stocks when they fall, and vice versa.

FXTIn theory, this could have a huge impact on the broader market when 0DTE trading surges. Given the recent shift in traders buying puts, this couldIntensified intraday sellingHowever, once these positions expire near the close, market makers may need to unhedge, thereby driving the stock market up.

That happened on Friday, when many put holders took profits and the S & P 500 rallied from its intraday low, Mr. McGregor said.

"They closed the puts at the end of the day to realise, thereby perking up the market. This is more of a volatility suppression phenomenon for 0DTE, as they either expire automatically in most cases or generate a reversal of market momentum when profits are taken at the close."