Exclusive: Wall Street examines risks around short-dated options as sources of bullish warnings

NEW YORK, March 10 (Reuters) – An explosion in trading in a type of equity derivatives in recent months has Wall Street players and a major clearing house examining the potential risks it poses, according to two sources familiar with the matter the case.

So-called zero day to expiry (0DTE) options, which refer to contracts that expire in less than 24 hours, offer retail and institutional traders a relatively inexpensive but high-risk way to bet on intraday fluctuations in stock prices. They can be tied to the price of indices, exchange-traded funds or individual stocks.

Some have warned that this type of option, which allows traders to reinforce market bets, could cause extreme selling.

In one example, analysts at JPMorgan said earlier this week that such a trade could increase volatility in U.S. stocks — potentially reversing a 5% intraday drop in the S&P 500 (.SPX) into a 25% rout.

The possibility of such a sale has raised concerns, prompting major players in the derivatives market to discuss exposure and risk to the broader market on at least two calls, two sources told Reuters.

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The Futures Industry Association (FIA), a trade group that includes major Wall Street players as well as the OCC as members, invited the OCC to join a call on 0DTE at a meeting on March 1, both the OCC and the FIA ​​confirmed. Members of the FIA ​​include the major banks on Wall Street.

“We are monitoring the increase in volumes of these products to better understand any risk management implications for the markets and continue to have an open dialogue with our members,” the OCC spokesman said. The OCC declined further comment on the content of its “private calls with clearing members.”

As a clearinghouse, the OCC settles and underwrites options contracts and acts as a central counterparty for credit risk.

An FIA spokesman said 0DTE was one of the topics discussed last week and described the call as routine.

Apart from the group meeting with the FIA, the OCC has also discussed this issue individually with some market participants, one of the sources said.

On one of the calls, the source said the participants explored potential systemic risks, including if prime brokers would be able to detect clients’ total exposure. The OCC told this person that it did not see a major risk, but it wanted to assess the views of its members and explore different risk scenarios.

The participants who spoke with the OCC concluded that existing safeguards would be sufficient, the source said.


Daily volume of 0DTE contracts on the S&P 500 (SPX) increased from about 400,000 in January 2022 to approximately 1.2 million in March 2023, representing a tripling of daily volume, according to data from OptionMetrics.

The calls with the OCC underscore a desire by options market participants to gain a deeper understanding of a corner of the market where both retail and institutional players seek to take advantage of intraday market movements.

Many 0DTE options have a low probability of increasing in value as they approach expiration. However, small changes in the price of the underlying stock or index can cause their prices to change as well. A large intraday market move can cause contracts to suddenly increase in value and expose their sellers to increased risk of large losses.

Analysts at JPMorgan have estimated that a big market move would trigger about $30 billion worth of buying or selling in those options, delivering what could be a volatility shock.

However, others said such a spike in volatility would be short-lived and unlikely to pose any systemic risk, as 0DTE contracts expire daily, limiting the ability to build positions over time.

“A lot of the volatility selling strategies we see in this market are in the form of spreads that limit the seller’s downside,” said Robert Knopp, co-head of the S&P options desk at Optiver, a market maker.

Reporting by Laura Matthews and Carolina Mandl; editing by Megan Davies and Anna Driver

Our standards: Thomson Reuters Trust Principles.

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