Investors shunned popular short-term stock options and turned to longer-term contracts for protection during the US stock market crash earlier this week.
The Zhitong Finance App learned that data shows that during the US stock market crash earlier this week, investors avoided popular short-term stock options and turned to longer-term contracts to seek protection. This revealed the limitations of so-called zero-day maturity options (0DTE) in preventing continued market fluctuations.
Since its launch in 2022, traders have been buying S&P 500 zero-date futures contracts, which sometimes account for more than half of the daily S&P 500 options trading volume.
Although these contracts are generally regarded as a tool for traders to speculate on short-term market trends, they are also used by institutional and retail investors to prevent market fluctuations.
However, investors abandoned these contracts on Monday, when the S&P 500 index fell 3%, and the Chicago Board Options Exchange Volatility Index (VIX) recorded the biggest intraday gain and finally settled at a four-year high. According to OptionMetrics data, the share of zero-date options in the total S&P 500 index options fell to 26%, lower than the average of 48% since this year.
Zero-date option trading volume share declined
Jim Carroll, portfolio manager at Ballast Rock Private Wealth, said, “What we are seeing is that people are hedging from the short term to the long term, and they need some contracts with longer terms.”
Analysts attributed this move to a number of factors. Soaring volatility has caused options traders to price zero-date options contracts at extremely high levels to manage their own risk. Market sources say this has increased the appeal of longer-term contracts. Longer-term contracts are more expensive during sell-offs, but are more popular with investors because they provide more lasting protection.
Garrett DeSimone, head of quantitative research at OptionMetrics, said: “The market doesn't seem to be able to price these options at such a high level of volatility. This also explains why the trading volume is insufficient.”
Trade Alert data shows that as the market calms down, the volume of short-term contracts rebounded to around 42% the day after the sell-off.
Craig Peterson, CEO of options research firm Tier 1 Alpha, said that amid the pain of the sell-off, investors worried about continued surging volatility saw no value in holding short-term contracts.
Data from OptionMetrics shows that on Monday, zero-date options trading volume fell 26% compared to the same period last month, while non-zero-date options jumped 42%.
“It's difficult to hedge long-term risks with one-day rights,” Peterson said. I think that's the real reason people are re-opting for longer-term contracts.”