The rapid growth in short-dated options that have become popular with hedge funds and retail traders alike is now spreading beyond stocks into other asset classes.
The Nasdaq last week launched new two-week options contracts that expire on Wednesdays based on the following exchange traded products:
The short-term options market is already well built out for contracts based on stock index products, such as the SPDR S&P 500 ETF Trust (SPY) and the Nasdaq 100-tracking Invesco QQQ Trust (QQQ). While options contracts historically expire on Fridays, the most popular stock indexes now have contracts that expire on every day of the week. This creates the ability for “zero-day to expiration,” or “0DTE,” options trading.
The new listings bring new asset classes a step closer to that reality.
“The Exchange believes that there is general investor demand for alternative expirations, including Wednesday expirations, as evidenced by the relatively significant percentage of volume in Wednesday SPY, QQQ, and IWM expirations,” the Nasdaq said in its rule change proposal in June. The Securities and Exchange Commission approved the products on Nov. 13.
The new funds come as trading in options that are about to expire has expanded dramatically as a share of the options market in recent years. According to data from Cboe, the percentage of options trading on the S&P 500 in contracts that expired in less than a day has gone from 8% in 2018 to at least 42% in every month this year so far.
The popularity may be due to traders looking for ways to take a position on the outcome of events that happen on a particular day. For example, the Wednesday expiration contracts would coincide with new policy statements from Federal Reserve eight times a year.
The rise of short-term options trading has created split opinions on Wall Street. For example, JPMorgan strategist Marko Kolanovic has warned that the craze could create a “volmageddon” type of event, but not everyone is concerned about the increased trading causing a risk to the markets. The term refers to an extreme volatility day in February 2018 that wiped out short-term strategies.
“In my mind, 0DTE has always been a risk day, but we’ve now spread that risk out across an entire month. So to me that makes it even less risky. And if you’ve got a handful of people who want to speculate on what the market might do on any given day, from when it opens to when it closes, so what, no big deal,” Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research, told CNBC.
Nasdaq said in its rule change proposal that it does not expect any “market disruptions” from the introduction of the new Wednesday options.
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