Traders Avoid Zero-Day Options Amid This Week’s Market Decline – Reuters

By Saqib Iqbal Ahmed

NEW YORK – Investors are shifting away from popular short-term equity options and opting for longer-term contracts as a safeguard during a recent downturn in U.S. stocks. This trend highlights the limitations of 0DTE (zero days to expiry) options in protecting against ongoing market fluctuations, data indicates.

Since their introduction in 2022, 0DTE contracts have gained significant traction, often comprising over half of the daily trading volume for S&P 500 options. While these contracts are frequently used for short-term market speculation, both institutional and retail investors have also employed them as a strategy to hedge against market volatility.

However, during a market plunge on Monday, when the S&P 500 dropped by 3% and the Cboe Volatility Index saw the largest intraday increase, interest in 0DTE options waned. Their share of total S&P 500 options volume fell to 26%, down from an average of 48% this year, according to data from OptionMetrics.

Jim Carroll, a portfolio manager at Ballast Rock Private Wealth, noted, “What we’ve seen here is a shift from short-term hedges to people saying, ‘oh, my gosh, I need something longer dated.'”

Analysts attribute this shift to several factors. The spike in volatility led options dealers to price 0DTE contracts at exceedingly high levels to mitigate their own risk, making longer-term contracts more attractive to investors. Although these longer contracts were also expensive during the selloff, they offered more durable protection.

“The market seemed unable to price these options at such high levels of volatility,” observed Garrett DeSimone, head of quantitative research at OptionMetrics, which may explain the drop in trading volume for 0DTE options.

Following the selloff, volume in short-dated contracts rebounded to about 42% as market conditions stabilized, according to Trade Alert.

Amid the market turmoil, investors concerned about extended volatility saw little value in retaining short-term contracts, noted Craig Peterson, CEO of options research firm Tier 1 Alpha.

On Monday, 0DTE options saw a 26% decrease in volume compared to the same day a month earlier, while non-0DTE options volume increased by 42%, according to OptionMetrics data.

“It’s difficult to hedge longer-term risk with a one-day option,” Peterson added. “I think that’s what’s really been driving people back into those longer-dated tenors.”