Jin Wang, a 35-year-old software product manager based in Houston, has experienced significant volatility as a day trader. His trading career is marked by extreme highs and lows, such as turning $26,200 into $73,000 in a single day in November 2022, contrasted by a day when he lost $20,000. Unlike many retail traders who were drawn to meme stocks like GameStop, Wang focused on intraday movements of the S&P 500 index. His approach involved a strategy that has surged in popularity: buying an option in the morning and selling it in the afternoon just before it expires.
This method of trading zero days to expiration (0DTE) options has gained traction, now accounting for nearly half of the daily volume of S&P 500 index options, a significant increase from 17% in 2020 according to Cboe Global Markets. These options have also become popular with the Nasdaq 100 and exchange-traded funds (ETFs) that track the S&P 500 and Nasdaq indexes. The appeal of 0DTE options lies in their potential for high, lottery-like payoffs. On a highly volatile day, a 2% intraday move in the S&P 500 or Nasdaq 100 can result in at least a 20% gain. However, the risk is equally high, as traders who fail to lock in gains quickly can lose their entire position by the end of the day. Additionally, hedging these positions can reduce potential gains, add costs, and be challenging to execute effectively.
Currently, 0DTE options are limited to major indexes and related ETFs, but there are ongoing discussions about expanding them to individual stocks, likely starting with megacaps such as Apple and Nvidia. JJ Kinahan, CEO of IG North America, which owns the brokerage tastytrade, mentioned that industry meetings are ongoing to address the necessary solutions for this expansion.
While some experts worry about the potential destabilizing effects of 0DTE options, proponents argue that these options allow traders to avoid overnight risk, make more cost-effective bets on an index, and hedge against market-moving events like Federal Reserve meetings. Despite the rapid increase in 0DTE trading volumes, which have reached an average of $780 billion daily in “notional” value for S&P 500 options, proponents believe the market remains balanced. BofA Securities notes that while there is no immediate threat of a market collapse similar to the 2018 “Volmageddon,” imbalances could develop if investors start using 0DTE options to chase large market moves, potentially amplifying volatility.
Michael Green, portfolio manager and chief strategist at Simplify Asset Management, cautions that 0DTE options could significantly impact market volatility, especially during periods of sustained uncertainty. The Cboe Volatility Index (VIX), Wall Street’s “fear gauge,” has remained low for years, but experts like James Smigiel, chief investment officer of SEI Investments, warn that these low volatility levels do not accurately reflect the global macro environment.
Zero-dated options are similar to standard call and put options in many ways. Calls offer the right to buy a stock at a preset “strike” price, while puts allow for selling at a preset price. The price of the option is called the premium, and the contract lasts until the expiration date. Index options, however, generally settle in cash, meaning traders must lock in their gains or losses.
The trend of 0DTE options gained momentum in 2022 when exchanges introduced S&P 500 and Nasdaq 100 options expiring on Tuesdays and Thursdays, in addition to the existing Monday, Wednesday, and Friday expirations. This change effectively provided daily expiration opportunities. Cboe has since added daily expiries for Russell 2000 index options and ETFs, and the Eurex exchange in Germany offers daily 0DTE options on the EURO Stoxx 50 and DAX indexes.
These options allow investors to make daily bets on market movements without the risk of overnight events, and they can be cost-effective. For example, buying one option against the S&P 500 typically costs upwards of $500,000. In contrast, 0DTE options pegged to ETFs are like fractional shares, allowing smaller investors to participate with lower dollar amounts.
Trading platforms like Robinhood Markets, Charles Schwab, and Bank of America’s Merrill Edge, as well as smaller firms like Moomoo Technologies, offer these options. For those who prefer not to trade options directly, the Roundhill S&P 500 0DTE Covered Call Strategy ETF (ticker: XDTE) is available.
Despite the allure of big gains often highlighted on social media, academic research suggests that 0DTE options may not be profitable for most retail investors. A study by researchers at the University of Münster in Germany found that retail investors lost more than $350,000 on 0DTE options on an average trading day between May 2022 and September 2023.
To limit losses, traders can use strategies such as “stop loss” orders or create a series of options to offset potential losses. However, retail traders face significant challenges. Institutional algorithmic traders and market makers can capitalize on split-second moves, often leaving retail investors with minimal opportunities. Additionally, bid/ask spreads in options can be wide, particularly in less active options, making it difficult to unload positions and eroding potential profits.
Hedging is not only costly but also requires impeccable timing. The time value of options, a significant component of their price, erodes quickly, much like the depreciation of a new car as soon as it leaves the lot. Consequently, investors must remain vigilant and continuously monitor the market. Joe Mazzola, director of trader education at Schwab, emphasizes that this type of trading requires active engagement and cannot be approached passively.
The resilience of the 0DTE market in the face of a black swan event—an unforeseen crisis—remains uncertain. These options have not been tested during extreme market panics, such as the Covid-induced selloff or the 2008-09 global financial crisis. Such events tend to reveal speculative excesses and prompt unpredictable reactions from investors and dealers.
The Cboe, which benefits from the volume of index options, maintains that the market is well-balanced between buys and sells. What matters, according to the Cboe, is not the high volume or the underlying “notional” values but the net positioning. Their study found that the daily net exposure of market makers typically ranged from $170 million to $670 million, which is less than 0.2% of the $400 billion traded daily in S&P 500 futures contracts.
Some brokerage executives, like Thomas Peterffy, founder and chairman of Interactive Brokers, downplay concerns about 0DTE options. He argues that with daily expirations, any day can be volatile, and the market is equipped to handle it.
However, negative feedback loops can arise unexpectedly. If positions become one-sided, dealers may be forced to rapidly buy underlying stocks to hedge, causing liquidity to deteriorate and contributing to a “volatility spiral.” Retail traders might attempt to exploit this volatility but could inadvertently exacerbate it.
The potential expansion of 0DTE options to individual stocks, particularly megacaps, is being considered. Discussions between regulators and exchanges suggest that this could happen as early as 2025. Investors express a strong demand for these options, and some brokerage executives predict their approval. However, issues such as handling events like earnings releases, which occur after the regular trading session ends, need to be addressed. Thomas Peterffy suggests limiting these options to highly liquid stocks to prevent manipulation and reduce the regulatory burden.
While the Cboe is currently the primary player in the 0DTE options market, the expansion to equities would likely attract other exchanges, increasing competition. Cathy Clay, global head of derivatives at Cboe, stresses the importance of thorough planning and readiness for any new options products.
The Options Clearing Corporation (OCC), which issues and settles most options and is overseen by regulatory bodies in Washington, is a key gatekeeper in this process. Both the OCC and the primary regulator, the Securities and Exchange Commission (SEC), declined to comment on the potential expansion of 0DTE options.
Jin Wang, who trades on the Moomoo platform, acknowledges that luck played a significant role in his 2022 payoffs. On one occasion, he bet on the S&P 500 declining during a Fed meeting and made $23,000 when stocks fell during Fed Chair Jerome Powell’s press conference. Another significant gain came when the S&P 500 rose over 5% in response to a favorable inflation report, turning his $26,200 position into $73,000. Overall, Wang has made about $20,000 from 0DTE trading. However, he now sets stop-loss orders and limits his willingness to take losses to $2,000 per month rather than per day. He advises against treating trading like a videogame, emphasizing the importance of caution and awareness of market unpredictability.