A potential stock-market catastrophe in the making: The popularity of these risky option bets has Wall Street on edge

Professional and amateur traders are flocking to a risky type of equity option that some have likened to lottery tickets, drawn by the opportunity to reap massive returns in the span of just a few hours.

Some on Wall Street are concerned that the growing popularity of 0DTEs is making U.S. markets more volatile and more fragile as outsize daily swings in the largest, most liquid equity indexes, like the S&P 500 SPX , become more frequent. During the first quarter of last year, 0DTEs represented just 22.5% of average daily trading volume in S&P 500 options traded on the Cboe. By the end of the fourth quarter, that figure had risen to 44%. Paul Woolman, global head of equity index products at CME, said trading in 0DTEs has continued to climb in early 2023.

Ernie Varitimos, a trader who runs a Twitter account dedicated to trading 0DTEs, told MarketWatch that it’s this “asymmetric” risk that drew him to them. This creates serious risk-management problems for market makers and traders who sell the options, given their open-ended risk. The Dow Jones Industrial Average DJIA plunged 1,175.21 points, or 4.6%, on Feb. 8, 2018. At that time, it was the biggest daily point drop for the Dow in history.

The fear is that if U.S. stocks experience a particularly sharp and unexpected move, the volume of 0DTE options suddenly trading in the money might overwhelm these hedges, causing a flash crash or a sudden destabilizing surge. But evidence of the profits and pitfalls of small-time traders buying and shorting — or betting against — 0DTEs is plastered across Wall Street Bets, a Reddit forum where traders go to brag about their profits and commiserate about their losses.

‘A game of ping pong’ There are already signs that trading in short-dated options may be leading to more outsize intraday swings in markets, said Brent Kochuba, the founder of options analytics service SpotGamma. “People will sell calls and buy puts at the highs, and then they’ll flip that at the lows,” Kochuba said. “It creates a game of Ping-Pong.”

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