Zero-Day Options Dominate S&P 500 Options Trading in Unprecedented Shift

For the first time ever, zero-day options (0DTE) on the S&P 500 Index surpassed all other expirations combined in the fourth quarter of 2024, highlighting the rapid growth of these short-term contracts, Bloomberg reports.

Trading in options expiring the same day averaged more than 1.5 million contracts daily during the last three months of 2024, representing 51% of the total S&P 500 index options volume. This is a significant increase from the same period in 2021, when 0DTE volume was less than half of later-dated options.

"It's a combination of higher intraday volatility, more macro catalysts such as the US election, as well as the continued adoption of index option trading by retail investors to manage and trade risk," said Mandy Xu, Cboe's head of derivatives market intelligence.

The meteoric rise of 0DTE contracts, first introduced by Cboe in the second quarter of 2022, gained traction during the COVID-19 pandemic among retail investors. The massive volumes now indicate a broader acceptance by institutional traders who utilize these derivatives to hedge against or bet on sudden market fluctuations.

"Daily option expirations have steadily been gaining acceptance, especially since they're starting to have enough history for backtesting systematic strategies," said Rocky Fishman, founder of Asym 500, to Bloomberg. "The sudden volatility spikes of 5-Aug and 18-Dec could only have helped things along."

While the popularity of 0DTE contracts is undeniable, some market participants express concern that the large volumes could exacerbate sudden market moves as dealers buy and sell underlying instruments to balance their positions. However, Cboe and others argue that investor trading is balanced between long and short positions, making it less likely for any significant market manipulation due to gamma hedging.

This shift towards 0DTE contracts underscores the increasing complexity of the options market and the evolving strategies employed by investors to navigate market volatility. As these contracts gain further adoption and historical data, their influence on market dynamics is likely to continue growing.