‘0DTE’ options trading could exacerbate stock market volatility

Mar 17, 2023

Lead Stories

‘0DTE’ options trading could exacerbate stock market volatility
Jamie McGeever – Reuters
Ultra-short-dated U.S. equity options should help protect investors from violent intraday price swings, but their popularity at a time of rising market instability could have the opposite effect.
So-called ‘zero days to expiry’ or ‘0DTE’ options, are designed for institutional investors to hedge their exposure to outsized price swings on days of known event risk, such as U.S. employment and inflation data releases, or Federal Reserve interest rate decisions.

$2.7 Trillion Wall of Expiring Options a Worry for Traders Reeling From Bank Crisis; Triple witching, index rebalance set to spur trading volume; Event may help ‘unpin’ S&P 500 from the 4,000 level: BI
Lu Wang – Bloomberg
Just as a week of global bank drama winds down, Friday’s options expiration risks creating fresh turmoil for traders. An estimated $2.7 trillion of derivatives contracts tied to stocks and indexes are scheduled to mature, obliging Wall Street managers to either roll over existing positions or start new ones. The process usually involves portfolio adjustments that lead to a spike in trading volume and sudden price swings. While the event has its benefits, such as amping up liquidity, that may not be enough to appease investors reeling from shocks ranging from the collapse of three US banks to hawkish comments from Federal Reserve Chair Jerome Powell.

Robinhood backs down over Signature Bank bets; Broker makes exception to its short position ban for clients who had winning ‘puts’ against failed lender
Jennifer Hughes – Financial Times
Robinhood has caved in to irate customers sitting on a windfall from betting on a fall in Signature Bank shares, after the online broker had threatened to let their lucrative positions expire without a payout. The investors had bought short-dated options on the Robinhood site that stood to net them big gains if the share price of Signature fell before the contracts expired.

Fear of Financial Crisis Has Unleashed Chaos Across Markets: 7 Charts
Anil Varma and Zinya Salfiti – Markets Insider
Global markets were already braving a period of extraordinary angst over inflation, interest rates, and recession risk when a sudden string of US bank failures sent shockwaves across the financial world.
That’s pushed investors across stocks, bonds, and commodities into crisis mode — with key market indicators flashing signs of elevated stress and some even lurching toward the extremes of previous turmoils.


ICE’s Global Commodity and Energy Markets Reach Record Open Interest with Record Volume in Oil Options
Intercontinental Exchange
Intercontinental Exchange, Inc. (NYSE:ICE), a leading global provider of data, technology, and market infrastructure, today announced record open interest (OI) across its global commodity and energy futures and options markets, with record volume in oil options. On March 15, 2023, ICE hit record OI of 51.1 million contracts across commodities futures and options, up 10% since the start of the year, as well as record OI in energy futures and options of 47 million. Across ICE’s global oil markets, OI is up 18% since the start of the year at 11.37 million contracts, with OI in Brent futures and options up 28% at 4.98 million contracts.

Crypto’s Deribit to Offer Futures for Bitcoin Volatility Trading
Suvashree Ghosh – Bloomberg
Deribit, the largest Bitcoin and Ether options exchange, plans to launch futures contracts to facilitate Bitcoin volatility trading. The BTC DVOL futures will be built on the Deribit Bitcoin Volatility Index, a measure of implied volatility in the market for the biggest digital asset, the company said in a statement earlier this week.

Micro E-mini Equity Index Futures Surpass 2 Billion Contracts Traded
CME Group
CME Group, the world’s leading derivatives marketplace, today announced that Micro E-mini Equity Index futures surpassed 2 billion contracts traded across all four indices on March 14.
Micro E-mini Equity Index futures became available for trading across four U.S. indices – S&P 500, Nasdaq-100, Russell 2000 and Dow Jones Industrial Average – in May of 2019.


OPEC+ Isn’t Panicking About Oil’s Sudden Drop — Yet
Javier Blas – The Washington Post
Oil has been perhaps the biggest collateral victim as the banking drama spread from California to Switzerland in recent days. In little more than a week, Brent crude has fallen by $10 a barrel, or about 15%. The speed and magnitude of the selloff has some investors asking: Where’s OPEC+? The oil cartel is, for now at least, in wait-and-see mode, and unlikely to act until the Federal Reserve concludes its next monetary policy meeting on March 22.

Stock market volatility this week has triggered a new sell signal
Lawrence G. McMillan – MarketWatch
The stock market, as measured by the S&P 500 Index, rallied on Thursday and has confirmed 4080 as a strong resistance level, with further resistance up to 4200. On the downside, there is support in the 3760-3850 trading range from last December. SPX has probed down into that range, and a break below 3760 would be extremely negative — not only from the viewpoint of violating support, but it is also considered a bear market condition if the December 2022 lows are taken out.

RUT Trading After SVB
Cboe (Video)
In this St. Patrick’s Day edition of the #RUTreport, @AngieMiles covers the impact of concerns about regional banks on Russell 2000 Index #options #trading $RUT.


What Are Zero-Day Stock Options and How Do They Work?
Bloomberg (Audio)
Zero- and one-day options give investors the ability to bet on the daily moves of the S&P 500. In recent months, both big institutional investors and retail traders have gotten in on the action, creating a boom in trading volumes of these short-lived contracts and sparking an intense debate over their effect on the market. So what exactly is driving their popularity and why are some Wall Street analysts so divided on whether such options will cause a rerun of the “volmageddon” that we saw back in early 2018 and that caused a big drop in stocks? Nomura Securities International Inc. strategist Charlie McElligott walks us through these new trading contracts, explaining how they work, why people are snapping them up, and what their impact on the market could be.

The Frenzy of Options Expiration Day Reminds Us: Time Really Is Money
Bob Lang – TheStreet
Options expiration usually is a time of confusion for traders and investors.
As you may know, when options expire, so does the opportunity to buy or sell stock. Options, of course, are a derivative of equities, and they give the buyer a great deal of leverage, sometimes 10-times or more than stocks. Options contain two components, intrinsic value and time decay.

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