Zero-Day is Here to Stay: A 0DTE Breakdown With Cboe

The ODTE is incredibly close to a one-to-one put/call ratio

Managing Editor
Nov 17, 2023 at 10:15 AM
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Subscribers to Chart of the Week received this commentary on Sunday, November 12.

The following is an excerpt from our latest episode of our Schaeffer’s Market Mashup podcast, featuring an insightful conversation with Cboe Global Markets’ Henry Schwartz. Henry unpacks everything you ever wanted to know about zero day to expiration options, or 0DTE, a strategy that is taking the industry by storm. To listen to the entire episode, access the media player at the bottom of this page.

 

Walk me through the options volume growth in the last few years.

Henry Schwartz: Before the COVID period, the option volume throughout most of the 2010’s to 2019 period was around 4 billion contracts a year, actually relatively flat. And then 2020 and 2021, things just exploded. We saw seven and a half billion contracts traded, and then nine billion, and then 10 billion. And then this year, we've got two more months to go and we're on pace for 11.2 billion contracts. Another record year for options. Something I'm pretty proud of is that the options growth has been a lot steadier than the growth in actual stock trading, which is much more cyclical and much more subjected to the whims of markets going up and markets going down. Even though the markets were down in 2022, we still had record option volume then. So you know, we continue to see interesting evolution of the market.

SPX Volume

Are 0DTE contracts the natural progression from the meme stock craze?

That’s partially true. There's certainly some people that made a fortune during the meme stock mania, whether they got lucky depends on how you want to frame it. But those same people, going into a sideways market or down market in 2022 and buying calls is not going to make you the money that made you in 2021. But many of those traders did the homework, figured out trades that made money in a sideways market, and started to understand vertical spreads as well as maintaining and adjusting trades. And that’s what we're seeing, some of those traders that had adapted to different market conditions are now adapting to new products, like the zero day contracts. And that's where we’re seeing the action now.

What are some of the ways a trader can utilize 0DTE options on the S&P 500 Index (SPX)?

Schwartz: If you're solidly long in the market up 1%. It may meet your goals to say, ‘you know what, I don't need any further upside today. But what I do want to do is sell some calls and take in some premium.’ And I'm very comfortable with that kind of risk reward, right? The risk is the market keeps going up. And maybe that fits you because you have a core long, and if the market goes back down, then you're going to have captured this premium.

And so the other things that we're seeing is a lot of complex order activity with some very heavy spread trading. Vertical spreads, calendar spreads, trades being adjusted and rolled, all because it's a hedging tool. So if you're a portfolio hedge, you're in unity to buy some puts to hedge for the rest of the year. As time passes, and the delta of the options changes or the expiration, you know, you're going to roll that trade to another strike, another contract, another expiration. So that's why you see so much spread activity, and typically for the S&P 500 Index (SPX), about 70% of the flow is complex orders like that, because it was such a systematic hedging product.

Say we opened up at $4,400. I'm going to sell the $4,420.30 call spread for $2. And maybe the $3,980.90, put spread for $2. We see a lot of that, but we also see trades where people put on a simultaneous four legged condor like that. And then they use very, very disciplined stop losses. Strategies that basically say: ‘Okay, well, if it does blow through one of my spreads, here's where I'm going to liquidate.’ They’re not just going to wear the thing out until it expires and see what happens. So if you basically kind of pick your risk profile, then you say, ‘okay, I want to do this every day at 9:42, and 9:56, and 10:14, and then manage that whole slew of trades over the course of the day.’ And they're happy with the performance. That doesn't mean it always makes money, but it means that they like the way these contracts behave.

Is there a put or call bias on these ODTE trades?

Schwartz: The ODTE is incredibly close to a one-to-one put/call ratio. That is evidence of the use case which involves basically whether people are buyers or sellers; they're doing it kind of symmetrically around the at-the-money. In that example I was talking about where we do see this kind of flow especially in the first couple hours of the day. With people selling a vertical put spread and selling vertical call spreads and very commonly doing both, that's going give you a put/call ratio of one; two puts and two calls. And then what we see over the course of the day customers managing it all by liquidating trades that that are blowing up on them -- because markets move, of course -- but also taking profits on trades that are going their way. But again, you're having these things trade in pairs a lot of the time.

 

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