Zero Day to Expiration (ODTE): The New Stock Options Dividing Wall Street Opinion

Zero-day-to-expiration (ODTE) is a current frenzy of trading explosive stock options, sending shockwaves on Wall Street and eliciting mixed reactions. While some have called them fads, others remain concerned about the risk they pose to the overall stock market. In contrast, some are billing them as the next big thing, following in the footsteps of leveraged ETFs and high-frequency trading.

ODTE Option Craze

Zero day to expiration are a stock option with a shelf life of less than 24 hours compared to the traditional options that expire after weeks or even months. The craze started last year and appears to be gathering momentum among traders that don’t like holding trades overnight.

The stock options came into being at the height of the meme stock era in 2021. However, it was after the Cboe Global market expanded S & P 500 options expirations to cover each weekday that they became popular. Moreover, their popularity ballooned as the market reversals became the order after the US Federal Reserve began aggressive monetary policy tightening.

They are popular among amateur traders, highly paid wall street players, and investment firms. Trading volumes on zero-day-to-expiration options account for over 40% of the total S&P 500 stock options volume, affirming their growing popularity.

Understanding the craze behind the new options is a challenge, given the enormous volumes involved and the short lifespans of the trades. Moreover, given that the options expire within a day, predicting how the market might move is much more difficult. As a result, while some market participants view them as securities for reducing market volatility, others believe they could be a source of significant market turbulence in the near future.

JPMorgan vs BOfA on ODTE Options 

Amid their growing popularity, JPMorgan strategist Marko Kolanovic believes they knew stock options present a significant danger. According to the investment firm, trading volumes on Zero days to expiration options are fueled by high-frequency traders, mostly computer-driven firms.

According to Kolanovic, the risk of the new form of options trading centers on people who take the other side of trades. The market makers must buy or sell to ensure market neutrality. If they ever stopped doing so, the result would be a total collapse of the entire derivative trading, creating an event risk as the one experienced in 2018 amid volatility implosion.

On the other hand, strategists at Bank of America have downplayed the risks insisting that the market is more well-balanced than it was five years ago. Moreover, given that not everyone is betting on one side of the market, the risk of volatility implosion is highly unlikely as they will always be people on the other side of the trade.

According to Bank of America strategists, the markets are no longer one-sided, which always presents significant risks. While ODTE trading was initially the buyer’s domain, it also attracts sellers, ensuring the market is no longer monolithic.

Amid the divided opinion from Wall Street players, one thing that both parties agree on is that zero-day-to-expiration stock options are making it difficult to gauge the fear on Wall Street. The Cboe Volatility Index, a sentiment indicator, is calculated based on stock options within 23 to 37 days. Since ODTE expires in less than 24 hours, they cannot be factored in the VIX indicator.