The Phenomenal Rise Of SPX 0DTE Options: Exploring Growth And Benefits

The U.S. options markets have witnessed a remarkable surge in trading activity over recent years, particularly in 0DTE (zero-days to expiry) options tied to the S&P 500 Index (SPX). This trend, outlined in a recent report by Cboe Global Markets CBOE, reflects a combination of factors such as commission-free trading by retail brokers, increased retail investor expertise and a heightened need for portfolio risk management in the wake of the COVID-19 pandemic.

SPX 0DTE's Meteoric Rise

According to the report, the average daily volume (ADV) of SPX options reached an impressive 2.76 million contracts in the first half of 2023, with 1.19 million of those contracts being 0DTE options. Although 0DTE options constitute just 6% of daily options volume, they represent a significant portion of the total premium and notional exposure traded, accounting for 33% and over 50%, respectively.

Benefits Of SPX 0DTE Options

SPX index options, including SPX 0DTE options, can offer distinct advantages over exchange-traded fund (ETF) options and single-name equity options. They feature European-style settlement – eliminating early exercise risk – and cash settlement, which simplifies the process. Moreover, these options hold the potential for favorable tax treatment. This unique combination of features has contributed to their popularity among various investor groups, including large institutions and mid-sized hedge funds as well as small retail traders.

The Unprecedented Growth Of SPX 0DTE Volume

From the introduction of SPX weekly Friday options in 2005 to the addition of Tuesday and Thursday expiries in 2022, 0DTE options' popularity has skyrocketed. They have progressed from representing 6% of the total SPX options volume in 2017 to a staggering 43% in 2023. This growth trajectory has been unparalleled and has far surpassed the expansion seen with other expiry terms.

Strategic Use Cases Of SPX 0DTE Options

Unlike the speculative nature of trading during the meme-stock era, the majority of traders engaging with SPX 0DTE options adopt a systematic approach. Over 95% of 0DTE customer opening volume adheres to a capped risk profile. Strategies often involve selling vertical call or put spreads – such as iron condors – to generate premium. The average strike width for these spreads has remained relatively narrow, reflecting the cautious approach taken by traders.

Short-Dated Options' Strategic Value

Short-dated options, including SPX 0DTE options, offer a cost-effective means of expressing short-term views, hedging portfolios or tactically trading around events like Federal Reserve announcements. Traders frequently sell short-dated options to capitalize on premium decay throughout the day. Interestingly, premium decay patterns shift on days when the Federal Reserve announces interest rate decisions – leading to distinct trading behaviors.

Chart #2: The Quantitative Story

The chart labeled "Chart #2" in Cboe’s report visually illustrates the surge in SPX's average daily volume of 170% compared to 2016. Furthermore, SPX open interest has grown by 41% during the same period. While this growth encompasses all expiries within the SPX complex, the most significant expansion has occurred in 0DTE options. This data paints a vivid picture of the shifting landscape and investor preferences within the options market.

Source: The Rise of SPX & 0DTE Options

The surge of SPX 0DTE options trading is a testament to the evolving dynamics of the options market and Cboe Global Markets' commitment to producing industry-defining products. Driven by a confluence of factors, these short-dated options have captured the attention of a diverse range of investors, offering strategic benefits that cater to varying risk appetites and trading styles. As trends continue to unfold, the enduring appeal of SPX 0DTE options seems poised to reshape the landscape of options trading for years to come.

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Featured photo by Jason Briscoe on Unsplash.

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