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Options with zero days before expiration are not for the faint of heart, but their popularity has continued to skyrocket recently, raising concerns about exaggerated market volatility. Daily notional volumes of these 0DTE options, which track the S&P 500 index, hit a record high of $1 trillion, according to JPMorgan. Marko Kolanovic, chief strategist at JPMorgan, warns of the risk of “Wolmageddon 2.0” if activity continues to pick up. Meanwhile, Goldman Sachs’ trading department called the record volume of these fleeting contracts “staggering.” What are 0DTE parameters? An option is a contract that gives its holder the right, but not the obligation, to buy or sell a certain amount of the underlying asset at an agreed price, known as the strike price, and on a specific date. Zero day expiration options are contracts that expire on the same day they are sold. With expiration approaching, 0DTE options are often tied to highly liquid assets such as the SPDR S&P 500 ETF (SPY) and other popular stocks and ETFs. So-called 0DTE contracts accounted for more than 40% of total S&P 500 options at the end of September, nearly doubling from six months earlier, according to Goldman data. How can I profit from 0DTE options? 0DTE options give traders the opportunity to quickly capitalize on positions, especially when there is a catalyst for price movement. Options with such short lives often have very low premiums to buyers. For example, an investor buys 0DTE per share call options hoping the earnings report will be stronger than expected. It turns out that the company does not live up to expectations, and the stock soars up. The share price rises, and with it the price of the option contract. The investor can hold the contract until the expiration date and take delivery of 100 shares. Alternatively, he or she may sell the option contract before expiration at the contract’s market price to pocket the difference. “Industrial Demand” Now, on the other side of this trade, the parties receiving the premium – usually the market makers – must hedge their position by buying the underlying asset. If these options become popular, their hedging will also become larger. “If there is a big move when these options are profitable and the sellers are unable to support these positions, forced coverage will result in very large directional flows,” Kolanovic said in a note. “These flows could particularly impact the markets given the current low liquidity.” Ivory Johnson, financial adviser to Delancey Wealth Management, said he suspects 0DTE options are creating demand for the stock and contributing to sharp intraday swings in the broader market. “The concern is that if volatility rises sharply, it could ease it,” Johnson said in an interview. “Especially if they do it in the red and then all of a sudden you get more selling pressure, it will just cause more and more hedging. So the more people doing the same, the more volatility can explode. “
Credit: www.cnbc.com /
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