One-Day Options Binge Making Market Macro Tea Leaves Unreadable

Quick: how did equity traders feel about inflation after Tuesday’s consumer price index hit? Depends on when you asked.

Everyone was bullish right after it came out. S&P 500 futures soared 1% as traders decided disaster had been avoided. Three and a half hours later, that optimism had evaporated: the index was down 1%. By the close stocks were back where they started, marking the third time they’d swung so widely this month alone.

While getting a grip on the macro message of markets is particularly hard at a time the Federal Reserve is fighting a pitched battle against price pressures, other factors native to the stock market itself may be playing a role in the unhinged moves. First among them, many analysts say, is the sudden mania for extremely fast-twitch options that traders have started to exploit with vigor as part of speculative operations when news is breaking.

These contracts, with shelf lives shorter than 24 hours, comprise a category known as zero-day-to-expire options that have exploded since mid-2022, at times causing derivatives to amplify moves in underlying assets. That’s made the task of figuring out the market’s collective thinking on the economy an especially futile exercise of late.

“These big swings like yesterday were a great example,” Jim Bianco, founder of Bianco Research, said in an interview on Bloomberg TV. “We have to be ready for this idea that, ‘hey, look, the market’s up 1%. What does it mean? Wait an hour, it’s now down on the day. Wait an hour, it’s back up on the day.’ That’s where I think that the 0DTE options are really starting to play. It’s the market that’s confusing a lot of people.”