Day traders are far more active in the booming world of zero-day stock options than Wall Street realizes, according to the exchange at the center of the frenzy.
Retail investors likely make up at least 30% of the volume in contracts tied to the S&P 500 that expire within 24 hours — and possibly up to 40% — according to Jonathan Zaionz, senior derivatives analyst at Cboe Global Markets. That’s much higher than estimates of around 5% given by academics and researchers at firms like JPMorgan Chase & Co.
Getting a handle on who’s behind the rise in options with zero days to expiration, or 0DTE, matters in part because retail money is perceived as less sticky and more speculative than institutional investors. Still, getting a clean read on market positioning isn’t easy since retail broker platforms — which according to Cboe account for 90% of all 0DTE volumes — are also used by pros.
“While it is impossible to know with absolute certainty, through data that we as the exchange can see – such as originating retail broker or original order size – we’re fairly confident that between 30% and 40% is true retail,” Zaionz said in an interview. “Since day one, the share has stayed pretty consistent, plus or minus a few percent each month.”
The varied estimates demonstrate the vexing nature of an investing tool whose influence in the equity market has sparked a heated debate on Wall Street. Most recently, Goldman Sachs Group Inc. and Bank of America Corp. have issued conflicting takes on whether these popular derivatives have fueled a stock selloff.
Source: Cboe
Zero-day options were discovered by retail investors as a convenient way of speculating during what became known as the meme-stock craze in 2021. Their reach widened in 2022 when exchanges including Cboe extended S&P 500 option expirations to cover all five weekdays, unleashing a new wave of 0DTE boom. The frenzy shot to new highs lately as the equity benchmark fell toward its worst month of 2023 amid frequent intraday reversals.
The participation of day traders and their track record have become a subject of interest to Wall Street players and academics. At JPMorgan, strategists including Peng Cheng developed an algorithm to identify transactions from individual investors through various factors such as execution quality and timing of trades. The team put retail’s market share in zero-day options at 5%.
While some treat the prevalence of small-size transactions as being associated with the retail crowd, others Like JPMorgan’s Cheng have argued it’s more likely computer-powered institutions breaking down big orders into small ones to cloak their strategies.
“‘Retail’ can mean different things to different people,” he said.
Also up for debate is how to approach complex 0DTE strategies that utilize layers of puts and calls in so-called multi-leg trades. Some view them as being mostly driven by big money, but Cboe’s Zaionz suggests small-time traders are also part of the game.
“Retail is a lot more sophisticated than it used to be,” he said. “Zero commission trading, ease of order executions, and the availability of trading tools and educational resources opened up access to the markets for retail participants.”
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