What’s going on here?
Investors are dropping zero-day options (0DTE) for longer-term contracts this week, seeking protection from prolonged market volatility.
What does this mean?
The recent upheaval in the US stock market has laid bare the limitations of zero-day options, which have been popular since their 2022 introduction and often make up more than half of daily S&P 500 options volume. On Monday, the S&P 500’s 3% drop and a significant spike in the Cboe Volatility Index (VIX) highlighted how vulnerable short-term contracts are to market swings. Consequently, the share of 0DTE options plummeted to 26% from an average of 48% this year, indicating a major shift in investor behavior.
Why should I care?
For markets: Hedging strategies evolve.
Increased volatility has made pricing zero-day contracts difficult, pushing investors towards more stable, longer-term options. The drop in 0DTE options on Monday highlights their limitations in safeguarding against sustained volatility. Experts from OptionMetrics and Ballast Rock Private Wealth confirm this trend towards long-term hedging strategies.
The bigger picture: Navigating future volatility.
The move to longer-term options indicates a broader reassessment of risk management amidst unpredictable market conditions. This trend could signify a shift towards more conservative, long-term investment strategies, potentially stabilizing markets. Data from Trade Alert showing the rise and fall in short-term contract volumes underscores the quick shifts in investor sentiment, emphasizing the need for adaptable, long-term planning.
