Zero-day options: How 0DTE options caused the S&P 500 to crash - a financial expert's analysis

Zero-day options: How 0DTE options caused the S&P 500 to crash - a financial expert's analysis

According to a report by finanzmarktwelt.de,
Yesterday there was a sudden drop in prices on the US stock markets without any stimulating news. The US leading index S&P 500 closed 1.5% lower – the biggest daily loss since September. According to market observers, the “zero-day options”, the so-called 0DTE, are responsible for the price collapse. The enormous volume in the options market and the short terms of these trades can trigger strong price movements.

Zero-day options cause the S&P 500 to crash
The 0DTE options are the hottest and most controversial derivatives trade this year. Market watchers are blaming 0DTE options as the villains behind yesterday's plunge in US stock markets. The options trades were likely triggered by the S&P 500's overbought terrain, limited trading volume due to upcoming holidays, and high volume of 0DTE put options expiring within 24 hours.

According to Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald LP, the market environment was ripe for yesterday's plunge due to overbought equity markets. The market slipped from an intraday high to a close, resulting in a 1.5% decline from the previous close. The relative strength index reached levels typically seen before a decline, and Wall Street's fear barometer - the VIX - rose sharply.

0DTE under criticism
The explosive increase in trading in 0DTE contracts continues to be critically discussed. While institutional investors use these options to hedge against short-term risks, retail investors can make big bets with small amounts of capital invested. JPMorgan's Marko Kolanovic warns that the product's popularity risks repeating past shocks. Options analysis firm SpotGamma and derivatives analysis firm Asym 500 attribute yesterday's price action to the 0DTE options.

According to Bloomberg strategists, the short-dated options have an even greater impact in an illiquid holiday market. Yesterday's events made it clear to market participants that participating in stock markets involves risks in both directions and that this has been easily forgotten in recent weeks.

So using 0DTE options has the potential to trigger strong price movements in the stock markets. Since these options trades are used not only by professional investors but also by private traders, it is important that investors keep a close eye on developments in the options market in order to assess the potential impact on the overall market.