Zero-day options (0DTE) on the S&P 500 index have seen a dramatic rise in popularity, exceeding all other expirations combined in the fourth quarter of 2024. This marks a significant milestone in the growing dominance of these short-term contracts.

What are Zero-Day Options?

Zero-day options are contracts that expire on the same day they are traded. They allow traders to speculate on or hedge against intraday price movements in the underlying asset.

The Rise of 0DTE

Trading in 0DTE options on the S&P 500 averaged over 1.5 million contracts per day in the last three months of 2024, accounting for 51% of the overall S&P 500 index options volume. This represents a threefold increase from the same period in 2021.

Several factors have contributed to the growing popularity of 0DTE options:

• Increased Intraday Volatility: The market has experienced heightened volatility in recent times, creating more opportunities for traders to capitalize on short-term price swings.
• More Macro Catalysts: Events such as the US election and Federal Reserve interest-rate decisions have created significant market uncertainty, driving demand for short-term hedging and speculative tools.
• Retail Investor Adoption: Retail investors have embraced 0DTE options as a way to manage and trade risk in a volatile market environment.
• Institutional Acceptance: Institutional traders are increasingly using 0DTE options to protect against or bet on sudden moves in the US benchmark.

Controversy and Concerns

The popularity of 0DTE options has also raised concerns about their potential impact on market stability. Some market participants worry that large trading volumes in these contracts could exacerbate sudden market moves as dealers adjust their positions. However, Cboe and others argue that investor trading is balanced between long and short positions, mitigating the risk of significant market disruptions.

The Future of 0DTE

The continued growth of oDTE options suggests that they are here to stay. As these contracts gain wider acceptance and their track record grows, they are likely to become an even more important tool for traders of all types.

Key Takeaways

• Zero-day options on the S&P 500 have become increasingly popular, exceeding all other expirations combined in the fourth quarter of 2024.
• Several factors, including increased intraday volatility, more macro catalysts, and adoption by both retail and institutional investors, have contributed to the growth of 0DTE options.
• While there are concerns about the potential impact of 0DTE options on market stability, their balanced trading activity suggests that they are unlikely to cause significant disruptions.