Traders Are Flocking to Risky Zero-Dated Options. ‘You Can Go Completely Broke.’
Jin Wang has taken some wild rides as a day trader. A software product manager in Houston, he says he turned $26,200 into $73,000 one day in November 2022. On another day, he lost $20,000.
Wang, 35, wasn’t trading meme stocks like GameStop. Rather, he was betting on intraday moves in the S&P 500 index. And he used a strategy that has soared in popularity: buying an option in the morning and selling in the afternoon, just before it expires.
Betting on the market’s intraday moves is nothing new, but it has taken off with options expiring by the trading day’s end. Known as “zero days to expiration,” or 0DTE, these options account for nearly half of the daily volume of S&P 500 index options, up from 17% in 2020, according to Cboe Global Markets, the exchange where they’re traded. Zero-dated options pegged to the Nasdaq 100 have also surged, along with options tied to exchange-traded funds that track the S&P 500 and Nasdaq indexes.
The appeal is rare, lottery-like payoffs. A highly volatile day with an intraday move of 2% in the S&P 500 or Nasdaq 100 might generate at least a 20% gain. The flipside is that traders who aren’t quick to lock in gains can lose their entire position before the day’s end. And hedging erodes your potential gains, adds more costs, and is tough to pull off efficiently.
“You can go completely broke, but there are occasional Lotto-sized payouts,” says Garrett DeSimone, head of quantitative research at OptionMetrics.
For now, the options are limited to major indexes and related ETFs. But individual stocks could be next. Brokerages and exchanges are in discussions about expanding 0DTE to individual stocks, which would most likely be megacaps such as Apple and Nvidia. “There are continuing industry meetings, with all sectors represented, to find a solution to these issues,” said JJ Kinahan, CEO of IG North America, which owns the brokerage tastytrade, in an email to Barron’s.
Whether 0DTE options will destabilize markets—especially if they proliferate to individual stocks—is a point of controversy.
Proponents argue the options allow traders to avoid overnight risk, bet on an index more cost-effectively, and hedge events like a Federal Reserve meeting that can rock the market. Their rise hasn’t coincided with a spike in volatility. And while volumes have soared—reaching an average $780 billion a day in “notional” value for 0DTE pegged to the S&P 500, up 36% from 2023 levels—the “0-day space remains well-balanced,” according to BofA Securities.
But some experts worry about destabilizing effects. One concern is that market makers could be forced to buy underlying positions en masse to hedge against a buildup of bullish or bearish option bets—resulting in bigger and more rapid swings in the S&P 500 and other indexes. The European Central Bank raised concerns about 0DTE options in May, arguing in a research paper that “in view of the increasingly crowded positions in such trades, their abrupt unwinding…could lead to a disorderly correction.”
BofA is sounding warnings, too. While it doesn’t look like 0DTE will trigger a 2018-style “Volmageddon”—when the market tanked due to a buildup of one-sided bets on volatility—imbalances could develop if investors “weaponize” the options to chase large up or down moves, BofA said in a recent note. “Fickle” and fragile liquidity in options could amplify the moves.
Some analysts see trouble brewing. “0DTE may change the calculus for market volatility significantly,” said Michael Green, portfolio manager and chief strategist at Simplify Asset Management. “If we get a sequence of events where there is a sustained period of uncertainty, you could see options act in a way that could make it more difficult to hedge day-by-day events. The market could correct relatively violently.”
Indeed, 0DTE options haven’t been truly stress-tested. The Cboe Volatility Index, or VIX, known as Wall Street’s “fear gauge,” has been muted for years amid a bull market. “These unusually depressed volatility levels are not reflective of the global macro environment,” said James Smigiel, chief investment officer of SEI Investments, which manages more than $443 billion in assets.
Riding the 0DTE Express
Zero-dated options get their name from their ephemeral life, but in many respects they’re no different than standard call and put options. Calls are contracts that offer the right to buy a stock at a preset “strike” price. Puts are contracts to sell at a preset price. The price of the option is called the premium, and the contract lasts until the expiration date, which may be a day, week, or months in the future. One equity or ETF option contract is multiplied by 100 shares of a stock.
Index options are different. They generally settle in cash, so anyone who trades them is effectively committing themselves to locking in a cash gain or loss.
The zero-dated trend took off in 2022 when exchanges added S&P 500 and Nasdaq 100 index and ETF options expiring on Tuesdays and Thursdays to their Monday, Wednesday, and Friday expiries. That turned three-day-a-week expiries into daily occurrences. Cboe added daily expiries for Russell 2000 index options and ETFs in January 2024. The Eurex exchange in Germany also offers 0DTE daily options on the EURO Stoxx 50 and DAX indexes.
With 0DTE options, investors can bet on market moves every trading day without taking risks on an overnight event. And they can be cost-effective. Buying one option against the S&P 500 costs upward of $500,000. 0DTE options pegged to ETFs are like fractional shares, breaking the index down into Chiclet-size bites, opening the trade to smaller dollar figures and more individual investors.
Traders can buy and sell the options through brokerages like Robinhood Markets, Charles Schwab, and Bank of America’s Merrill Edge, along with smaller outfits like Moomoo Technologies. For those who don’t want to dabble in options directly, there’s now an ETF: Roundhill S&P 500 0DTE Covered Call Strategy (ticker: XDTE).
The options are inspiring retail traders who moved on from meme stocks during the pandemic, says John Bartleman, CEO of brokerage TradeStation. “A lot of customers are jumping into 0DTE. It’s a popular trading vehicle,” he says.
Despite big gains touted through social media, some academic research indicates the options are a losing trade for most people. Retail investors lost more than $350,000 on 0DTE options on an average trading day between May 2022 and September 2023, according to a study by researchers at the University of Münster in Germany. “0DTE options are on average not a lucrative investment vehicle for retail traders,” the researchers wrote.
The way to limit losses is to hedge or take other protective measures. One technique is to use “stop loss” orders, or string together a slew of options so that if one falls apart, another pays off. Justin Zacks, vice president of strategy at Moomoo, says only about 6% of 0DTE options on the platform are held to expiration and that most investors are mitigating risk by putting limit or stop-loss orders in.
But retail traders face heady challenges. Institutional algorithmic traders and market-makers pounce on split-second moves, leaving retail with the crumbs. Bid/ask spreads in options can be wide: While they are tight in the most actively traded options, they are far apart on less active ones, where it can be tough to unload a position and the wide spreads erode profits on a trade.
Hedging is tough to get right, imposes high costs, and requires near-perfect timing. And investors must be vigilant since the time value of options—a large component of their price—erodes quickly. “It’s like taking a new car off the lot. The price starts to depreciate. 0DTE options are similar,” says DeSimone.
Investors who step away from their screens might miss a sharp intraday move. “This is not something you can put a position on and place your hands in your pocket and run away,” says Joe Mazzola, director of trader education at Schwab.
What’s unknown is how the 0DTE market will handle a black swan event—something unforeseen that takes everyone by surprise. Zero-dated options haven’t been tested in a panic like the Covid-induced selloff or the 2008-09 global financial crisis. Those types of events tend to flush out speculative excesses and cause investors, dealers, and others to act in unpredictable ways.
The Cboe, which profits off index options volume, argues the market is well balanced between buys and sells; what matters aren’t high volumes or underlying “notional” values, but net positioning, it says. Based on its study of market activity, the Cboe found that daily net exposure of market makers typically ranged from $170 million to $670 million—less than 0.2% of the $400 billion traded daily in S&P 500 futures contracts.
Some brokerage executives say they aren’t worried. “I don’t understand the big brouhaha,” says Thomas Peterffy, founder and chairman of Interactive Brokers. “Now that every day is an expiration day, any day can be more volatile.”
But negative feedback loops can come out of nowhere. If a tide of positions turns one-sided, dealers may be forced to rapidly buy underlying stocks to hedge; that could cause liquidity to deteriorate and add to a “volatility spiral,” the ECB said in a report. Retail traders might try to jump on the trade, aiming to exploit the volatility, but may only wind up contributing to it.
The next step for 0DTE options may be individual stocks. The idea would be to add four more days to current weekly option expirations for companies like Nvidia and other megacaps. Traders might then be able to take same-day positions ahead of a major event such as a quarterly earnings report.
Discussions have taken place between regulators and exchanges about allowing 0DTE options for some stocks, possibly as soon as 2025, according to a person familiar with the matter. The individual stressed that all the relevant parties are still in the “analysis phase” and are being “supercautious.”
Brokerage executives interviewed by Barron’s said investors want the product, and some predicted it would be approved. “I think single-stock 0DTE trading is coming within the next two to three years,” says Zacks of Moomoo.
“There is demand for it, and people should be treated as adults with how they invest,” Kinahan said.
But a few things would have to be ironed out. Perhaps the biggest issue is how to deal with events like earnings releases; 0DTE options expire after the regular trading session ends at 4 p.m. Aftermarket trading following an earnings release and conference call may be even more volatile with 0DTE in the game.
Peterffy says that having 0DTE options for companies would make sense, with limitations. He says he isn’t concerned about the impact on megacaps or widely held large-caps. But there could be opportunities for fraud with less actively traded companies, just as there is with meme stocks that can be manipulated by hedge funds or gangs of retail traders.
“Do it only for very liquid stocks,” he says. “Otherwise it would be easier to manipulate the market, and there would be more things for regulators to have to watch.”
The Cboe is now the key player in 0DTE options, but that would likely change if they spread to equities. Other exchanges would come into the market, competing for trading volumes in a product that has already shown enormous appeal to many investors.
“Any new options products must be well thought out by all industry participants to make sure it’s ready,” says Cathy Clay, global head of derivatives at Cboe.
The key gatekeeper is the Options Clearing Corporation, the organization that issues and settles most options and is overseen by regulatory bodies in Washington. The OCC declined to comment, as did the option market’s primary regulator, the Securities and Exchange Commission. Among exchanges, the Nasdaq and the New York Stock Exchange declined to comment.
Wang, who trades on Moomoo, acknowledges he got lucky on his payoffs in 2022. On one of those days, he had bet on the S&P 500 going down the morning of a Fed meeting, and cashed in for $23,000 when stocks turned negative during Chair Jerome Powell’s press conference. An even bigger payout came when the S&P 500 popped more than 5% in one day on a benign inflation report, turning his $26,200 position into $73,000, according to screenshots viewed by Barron’s.
Overall, Wang says, he made about $20,000 since he started 0DTE trading. But he now sets stop-loss orders and is only willing to take a $2,000 loss every month, not every day. “Trading sometimes involves luck,” he says. “Don’t treat it as a videogame. You never know where the market is going.”
Write to Paul R. La Monica at [email protected]