Goldman Sachs to wrote about ODTE options, which stands for zero days to expiration.
There has been a surge in trading volumes in options and trend has gone from monthlies, to weeklies, to dailies to today. It’s symptomatic of market participants that are ceaselessly YOLOing every trade imaginable.
Goldman highlights how the notional value of options is reaching stratospheric levels with $45 billion in notional needed to be hedged at the end of the day on Wednesday.
“There is not enough liquidity on the screens to handle market makers delta hedging such a dramatic move over a short 20 minute period,” wrote Goldman MD Scott Rubner.
Nomura is also warning on how the rising values of ODTE options trading is adding to volatility.
UBS in a note from Tuesday looked at July 27, when news about Bank of Japan’s potential hawkish move in monetary policy broke; Aug. 4, the day of the latest US monthly payrolls data; and Aug. 10, when America’s consumer price index was released.
The drops on July 27 and Aug 4, the UBS said, coincided with a wave of put purchases in zero-day options while the Aug 10 rebound was partly due to profit taking on CPI later in the day.
The question is whether or not this is the tail wagging the dog?
ZeroHedge has a great look at ODTE options today and outlines how they help to contain volatility when intraday stock market moves are less than 1% but that once moves exceed that, they feed into overshoots.
From where I stand, markets are far too fragile and regulators are sleeping. We saw this with the blowup in Treasuries at the outset of the pandemic and we’ve seen no changes in regulatory action since. Similarly, there appears to be no appetite to curb options trading, even though it’s tough to place any kind of economic value on it, especially 0DTE options. I have to wonder if it will take a 1987-style event to cause a rethink.