There’s an invisible force driving the most popular options trade of the year — one that gives Wall Street pros and day traders alike the power to turn a $1 investment into a $1,000 stock bet.
Put another way, traders are getting $1,000 of stock exposure for every dollar they spend on 0DTE. They would need to spend 10 times that to get the same equity position using derivatives with a longer lifespan, a Bloomberg analysis on Cboe’s data shows. It’s like property insurance, where home owners are usually charged less for six-month coverage than for three years simply because hazards are less likely to occur over a shorter period of time. The six-month package looks less expensive on paper, though it isn’t necessarily a better deal.
Weighing the risks and benefits of 0DTE trading has become a pastime for Wall Street since exchanges expanded index option expiration to every weekday last year, sparking the surge in activity. ADVERTISEMENT CONTINUE READING BELOW To the 0DTE faithful, the very fact that the sum of capital at stake is far less than what’s suggested by the headline volume points to the lower likelihood that wrong-footed positioning could unleash a wave of volatility.
Fueling the trading boom is the proliferation of multi-leg strategies, those that layer puts or calls as part of a systematic trade. While the notional volume involved is huge, Diamond sees these compound trades posing limited risk as they typically sell one option and then buy back a further out-of-the-money option — largely offsetting each other in terms of market impact.