Zero-day-to-expiration options are not for the faint of heart, but they still exploded in popularity as of late, spurring concerns of exaggerated volatility in the market. Daily notional volumes in these 0DTE options that track the S & P 500 index exploded to reach a record $1 trillion, according to JPMorgan data. Marko Kolanovic, the top strategist at JPMorgan, warns of the risk of "Volmageddon 2.0" if the activity continues to accelerate. Meanwhile, Goldman Sachs' trading desk called the record volume in these fleeting contracts "staggering." What are 0DTE options? An option is a contract that gives its owner the right, but not the obligation, to buy or sell a specific amount of an underlying asset at an agreed-upon price, known as the strike price, and on a specific date. Zero-day- to-expiration options are contracts that expire the same day that they're traded. With the imminent expiration date, 0DTE options are often tied to assets with high liquidity, like the SPDR S & P 500 ETF (SPY) and other popular stocks and ETFs. So-called 0DTE contracts accounted for more than 40% of the S & P 500's total options volume at the end of September, almost doubling from six months earlier, according to Goldman data. How does one profit from 0DTE options? 0DTE options give traders an opportunity to capitalize on positions quickly, especially when there's a catalyst to move the prices. Options with such a short lifespan often have a very low premium for the buyers. For example, an investor buys 0DTE call options on a stock, hoping an earnings report comes out stronger than expected. It turns out that the company crushes expectations and the stock explodes. The share price rises, and so does the price of the option contract. The investor could hold the contract until the expiration date and take delivery of the 100 shares of stock. Alternatively, he or she can sell the options contract before the expiration date at the market price of the contract to pocket the difference. 'Manufacturing demand' Now on the other side of this trade, the parties receiving the premium — typically market makers — have to hedge their position by buying the underlying asset. If these options get popular, their hedge would get bigger, too. "If there is a big move when these options get in the money, and sellers cannot support these positions, forced covering would result in very large directional flows," Kolanovic said in a note. "These flows could particularly impact markets given the current low liquidity environment." Ivory Johnson, a financial advisor at Delancey Wealth Management, said he suspects that 0DTE options are manufacturing demand for stocks and contribute to wild intraday swings in the broader market. "The concern is that if the volatility explodes, this can facilitate it," Johnson said in an interview. "Especially if they do it on the downside, and then all of a sudden you get more selling pressure, it's just going to cause more and more hedging. So the more people that are doing the same thing, the more that volatility can explode."
