Under the storm of the US stock market, zero-day options are no longer "popular"

According to the Zhitong Finance and Economics APP, data shows that during the stock market crash earlier this week, investors avoided popular short-term stock options and turned to longer-term contracts for protection, exposing the limitations of so-called zero-day expiration options (0DTE) in guarding against sustained market volatility.

Since its launch in 2022, traders have been buying S&P 500 zero-date options contracts, sometimes accounting for more than half of the daily trading volume of S&P 500 index options.

While these contracts are typically seen as speculative tools for traders to speculate on short-term market trends, they are also used by institutions and retail investors to hedge against market fluctuations.

However, investors abandoned these contracts on Monday when the S&P 500 index fell by 3%, and the Chicago Board Options Exchange Volatility Index (VIX) saw its largest intraday increase, ending at a four-year high. Data from OptionMetrics shows that the share of zero-date options in the total volume of S&P 500 index options dropped to 26%, below the average level of 48% so far this year.

Jim Carroll, portfolio manager at Ballast Rock Private Wealth, said, "What we are seeing is a shift in people's hedging behavior from short-term to long-term, where they need contracts with longer maturities."

Analysts attribute this shift to various factors. Soaring volatility has led options traders to price zero-date contracts at extremely high levels to manage their own risks. Market participants say this has increased the attractiveness of longer-term contracts. Although longer-term contracts may be expensive during sell-offs, they are more popular among investors because they provide more lasting protection.

Garrett DeSimone, Director of Quantitative Research at OptionMetrics, said, "The market seems unable to price these options at such high volatility levels. This also explains why trading volume is low."

Data from Trade Alert shows that as the market calms down, trading volume of short-term contracts rebounds to around 42% on the second day after the sell-off.

Craig Peterson, CEO of options research firm Tier 1 Alpha, said that investors worried about continued spikes in volatility during the sell-off believed that holding short-term contracts had little value.

OptionMetrics data shows that on Monday, trading volume of zero-date options decreased by 26% compared to the same period last month, while trading volume of non-zero-date options surged by 42%.

Peterson said, "It's difficult to hedge long-term risks with short-term options. I believe this is the real reason prompting people to choose longer-term contracts again."