TWO years after Wall Street’s love affair with fast-twitch stock options began, Bloomberg’s latest Markets Live (MLIV) Pulse survey suggests the unprecedented boom still has room to run – even as almost half of respondents fear an eventual blowup.
With the notional value of zero-days-to-expiration contracts tied to the S&P 500 hitting roughly US$862 billion in April, almost 90 per cent of 300 MLIV Pulse respondents said they expect the growth to continue. The twist? They are about evenly split on whether it will grow steadily or end in calamity.
Equity derivatives with less than 24 hours to expiration, known as 0DTE, have become one of Wall Street’s most popular trades as investors big and small seek to navigate uncertainty over the economy and central bank policy. Trading in 0DTE made up 45 per cent of the total options volume for the S&P 500 last year, about double the level from before the products became widely available in the second quarter of 2022.
“The exchanges are making money hand over fist by allowing daily options. As you have seen, the volume has gone up because more and more people have access to it,” said Phil Pecsok, chief investment officer of Anacapa Advisors. “They are only going to become more prevalent.”
The scale of the boom has stirred controversy. There are concerns the activity in ultra-short-dated options may be affecting stock volatility, while research has suggested that retail investors using them mostly lose money.
A majority of survey contributors showed awareness of the latter risk, with 56 per cent expressing the view that it’s too easy to lose money with the tools. But the concerns did not extend to limiting retail access to 0DTE, with 76 per cent of respondents – almost two thirds of whom are professional investors – saying it was only fair to keep them easily available.
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Initially picked up by high-frequency traders to make wagers or hedge positions, zero-day options are gaining traction among sophisticated quant pros and small-fry investors alike. They have also found their way to the exchange-traded funds (ETFs) arena.
Both academic and Wall Street researchers have flagged potential dangers with this wave of trading, including that it may make the market more volatile on an intraday basis. JPMorgan Chase & Co strategist Marko Kolanovic has warned their popularity risks reprising past disasters such as the 2018 Volmageddon episode, a famous blowup that shattered a lengthy calm in US stocks. The theory is that a big stock move could force options dealers, who take the other side of trades and must buy and sell shares to keep a market-neutral stance, to unwind a large amount of their own positions, accelerating any sell-off.
The exchange at the centre of the boom, Cboe Global Markets, has argued that the wide range of use cases for 0DTE means the trades are not creating the kind of crowded one-way bet that might make the market vulnerable to shocks. Cboe expanded expirations of S&P 500 options to every work day about two years ago and later also allowed zero-day options for the Russell 2000 Index.
In the latest expansion, Nasdaq said it plans more short-term options on commodities and Treasury ETFs.
Opinions about the impact of 0DTE on the underlying market were fairly evenly split in the MLIV survey. Only around a quarter of respondents said they worried a lot about it, with 34 per cent not worried and 41 per cent only a bit worried.
Asked how they would describe 0DTE, the MLIV Pulse contributors – who are predominantly in the US or Europe – were often scathing. “Gambling” was the most common phrase offered. A “slot machine in Vegas”, “atom bombs”, and “tools resulting in a wealth transfer from retail and unsophisticated institutions to exchanges and market makers”, were among the negative descriptions.
The positive contributors largely focused on their usefulness as a hedging tool. As one participant said: “It is a fairly inexpensive way for investors to take a position in the directional move of a stock without having to own the underlying shares.”
So far, 0DTE are available only for major indexes and ETFs. Their popularity has fuelled speculation that zero-day contracts could be broadened to cover single stocks. Asked about that potential expansion, survey respondents were perfectly divided. BLOOMBERG
FAQs
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.
What happens to puts if a stock goes to zero? ›
For a put writer, the maximum gain is limited to the premium collected, while the maximum loss would occur if the underlying stock price fell to zero.
What is IV in options? ›
Implied volatility is the market's forecast of a likely movement in a security's price. IV is often used to price options contracts where high implied volatility results in options with higher premiums and vice versa.
Can a stock go to zero what type of things would cause this to happen? ›
Real-World Example of a Stock Losing All Its Value
Sometimes a company will be forced into bankruptcy and its stock fall to zero as the result of an accounting scandal or fraud. Take the famous case of Enron, a large and influential energy and trading company in the 1990s.
Do I lose my money if a stock is delisted? ›
Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.
Can I lose my IRA if the market crashes? ›
A recession could result in a lower IRA balance, but that's not guaranteed to happen. If a recession does negatively impact your IRA, your best bet is to do nothing. It's a good idea to have an emergency fund for surprise expenses that could pop up during a recession, so you can let your IRA recover.
Do stocks ever come back from zero? ›
Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.
Can you write off a delisted stock? ›
Technically the IRS requires that a stock be totally worthless before you are entitled to a deduction.
What is the safest investment in stocks? ›
1) Preferred Stock
These securities are ideal for investors seeking stable income with less risk than common stocks but more potential returns than bonds. Preferred stocks are often issued by financial institutions and large corporations to raise capital without diluting voting power.
Should you buy options when IV is low? ›
When you discover options that are trading with low implied volatility levels, consider buying strategies. Such strategies include buying calls, puts, long straddles, and debit spreads. With relatively cheap time premiums, options are more attractive to purchase and less desirable to sell.
IV can change often and will vary from one option to the next, even when the options are on the same underlying stock. All else equal, the higher the IV of an option, the higher the options premium, and therefore a bigger expected price change in the underlying stock.
Is IV good or bad for options? ›
Low IV environments equate to lower priced options due to a lack of extrinsic value; and high IV environments equate to higher priced options due to the abundance of extrinsic value. IV and extrinsic value in options prices always share a positive relationship.
Do you lose all your money if the stock market crashes? ›
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.
Is stock worthless after chapter 11? ›
There are a few potential outcomes if a company you've invested in files Chapter 11 bankruptcy: The company cancels its old shares and issues new ones. Your old shares would then become worthless. The company continues using its old shares.
What is the largest equities market in the world? ›
New York Stock Exchange
But it has remained the largest stock exchange in the world by market capitalisation ever since the end of World War I, when it overtook the London Stock Exchange.
What happens to your stock if it hits 0? ›
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.
What would happen if there was no stock market? ›
You'd Have to Buy and Sell Your Own Stock
Without a bustling stock market, each person wanting to buy an interest in a company might have to transact directly with that company, requiring their attorney and banker, among other professionals.
Do stock prices ever go to zero? ›
Certainly! Imagine you bought a company's stock for $100, hoping its value would go up. However, if the company faces serious financial problems and its stock price falls to $0, it means the company is essentially bankrupt. In this situation, you can't make money from that stock because it's worth nothing.
What happens if I short a stock and it goes to 0? ›
The investor does not have to repay anything to the lender of the security if the borrowed shares drop to $0 in value. If the borrowed shares drop to $0 in value, the return would be 100%, which is the maximum return of any short sale investment.
