0DTE options surge: Why investors are betting big on same-day expiries

Key Takeaways

• Options trading has boomed, with equity options at the forefront.
• Zero day to expiration (0DTE) contracts have gained the most traction to hedge risk.
• Investors and traders need to have a well-defined strategy and understanding of these complex contracts.

As 2024 came to a close, industry experts were out in force assessing new trends and those that were likely to repeat. Although it is still early days, the general consensus is that zero day to expiration options (0DTEs, also known as same-day expiration options) could reprise their success in 2025.

What are 0DTEs?

0DTEs enable investors to bet on whether a particular stock-market index will rise or fall by the end of the day. A relatively new phenomenon, 0DTEs took off three years ago when exchanges added S&P 500, Nasdaq 100 index, and exchange-traded options expiring on Tuesdays and Thursdays to their Monday, Wednesday, and Friday expiries. That turned three-day-a-week expiries into daily occurrences.

Last year, Cboe included daily expiries for Russell 2000 index options and exchange-traded funds. Meanwhile, Germany’s Eurex exchange offers 0DTE daily options on the EURO Stoxx 50 and DAX index.

0DTEs enjoyed a record-breaking 2024. They were the most traded on the S&P 500 in the fourth quarter, surpassing all other expirations for the first time ever. Research from Cboe Global Market, with data compiled by Asym 500, showed 0DTEs averaged over 1.5 million trades daily, constituting 51% of the index’s total S&P 500 options volume. This is a significant hike from 2021, when their share was less than half.

The Cboe report attributed 0DTEs growing popularity to higher intraday volatility and a rise in macro catalysts – such as the US election, and a shifting economic backdrop. The demand was also part of retail investors’ continued adoption of index option trading to manage and trade risk. They have become easier to access due to low-cost electronic trading, improved pricing models, and online analysis tools.

Their overall growth is reflected in the Options Clearing Corp’s annual report which revealed that volumes rose 10.9% year-on-year to $12.3 bn. Equity options were the favorites, accounting for around half of the final tally. They recorded an all-time high of 6.5 billion contracts, up 16% from 2023 – the fifth consecutive year of gains. Index options were in second place with a 8.9% jump to 1 billion contracts.

Key selling points

It is easy to understand why equity options have gained traction over the past couple of years. The main appeal of trading zero day options is that they offer a cost-efficient way to hedge risk, an increasingly important attribute in today’s post-Covid markets. Volatility has spiked due to rising interest and inflation rates as well as geopolitical tensions in Ukraine and the Middle East. They are seen as an insurance policy – if an investor anticipates a downturn in the market, they can purchase a put option on an equity futures contract, which provides protection should stock prices fall.

Equity options are also versatile as strategies can be tailored for different market conditions. This enables investors to exploit market volatility, stagnation, or anticipated directional moves. They also provide leverage, which means that with a small initial investment, a trader can control a much more prominent position in the underlying equity index. Although the leverage comes at a cost, buying calls or puts outright also have a limited-loss benefit.

While 0DTEs share benefits with the equity options family, they also have the advantage of having the expiration date set on the same trading day. So, there are opportunities for quick decision-making and potentially strong returns. This is especially advantageous for premium sellers, who can capitalize on the extremely fast theta decay (that is, the rate of decline in the value of an option over time).

Other selling points include a lower premium compared to options with longer expiration dates due to their shorter expiration timeline and greater flexibility. This is because traders can take profit son short-term market movements without the long-term commitment that other options require. Moreover, 0DTEs offer a targeted solution to mitigate intraday risks.

The flip side

Proponents contend that 0DTE options enhance market liquidity and provide efficient tools for risk management. However, their growing dominance has raised concerns that these short-term contracts could intensify market swings, as dealers buy and sell underlying instruments to balance their positions. Options trading is also inherently complicated, and the rapid time decay of 0DTE options adds another layer of complexity, while the leveraged nature of options in general means that investors can lose more than their initial investment.

All agree that investors and traders need to understand the inner workings of options trading fully, particularly 0DTEs. This means acquiring detailed knowledge of the markets and having a well-defined strategy with the requisite tools and technology to trade and invest in these contracts.