Bank of America Disputes Goldman Logic on Zero-Day Option Threat to Stocks

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The heated debate on the threat posed by the boom in stock derivatives that expire within 24 hours is pitting two of Wall Street’s biggest banks against each other.

After Goldman Sachs Group Inc. blamed the rise of zero-day options for the late-afternoon S&P 500 selloff seen on Aug. 15, Bank of America Corp. dubs the logic “largely misguided.”

In Goldman’s view, rising client demand for those contracts forced market makers on the other side of the transactions to abruptly hedge their exposures — ultimately leading to a sharp drop in share prices over a roughly 20-minute span. After breaking up flows into buy and sell orders, strategists including Matthew Welty found customers were net sellers of only 1,000 contracts. Theoretically that positioning amounted to a bullish stock wager that would have required market makers on a mission to balance their books to snap up shares — rather than, as per Goldman, sell.

More than a year after 0DTE contracts became available for S&P 500 traders for every weekday, debate goes on about its impact on the marketplace. Analysts such as JPMorgan Chase & Co. quant guru Marko Kolanovic warn their popularity risks reprising past shocks such as the 2018 Volmageddon episode, while others see just another example of doomsayers stirring up fear over the latest market evolution.

 

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