Wall Street Targets the Booming Retail Options Market with Zero-Day Expiries

Accusations have been made that it exacerbates stock market volatility, while others write it off as merely the newest example of market speculation reaching excessive levels. Nevertheless, the surge in trading of equity options with zero days to expiration, known as 0DTE, has caught the attention of numerous Wall Street brokers. Undeterred by the potential risks, whether perceived or actual, these brokers are innovatively crafting strategies to stake their claim in this burgeoning market segment.

Firms such as Options AI have reported a doubling in trading volumes since introducing S&P 500-tied options. Moomoo Technologies Inc. and Webull Financial LLC are also making moves to attract day traders by waiving exchange fees and allowing clients to sell derivatives without owning the underlying assets, respectively. Robinhood Markets Inc., already offering 0DTEs on certain products, plans to extend its offerings to broad index options.

This rush comes as both institutional and retail investors navigate a stock market influenced by new economic data and speculation about monetary policy. The Federal Reserve has taken notice, incorporating questions about 0DTE risk management into its surveys, signaling the growing scrutiny of these trades.

0DTE options have seen a 48% volume increase last year, outpacing the broader options market’s growth. Retail investors, constituting up to 40% of these transactions, are drawn by the low entry cost and the potential for significant returns. However, the volatility of these options raises concerns about whether risk management practices can keep pace with the rapid trading environment.

The expansion of S&P 500 option expirations to all weekdays since mid-2022 has turned 0DTEs into a significant revenue source for exchanges like Cboe Global Markets. Despite brokers typically charging contract fees, the sheer volume of 0DTE trading likely generated substantial revenues last year.

A Federal Reserve survey revealed that many dealers struggle to identify client strategies for 0DTE trading or assess changes in risk appetite during volatile market periods. Furthermore, some dealers do not require collateral for 0DTE trades, and nearly all have maintained unchanged risk control measures since 2022.

Despite the inherent risks of rapid losses in a volatile market, firms like Moomoo boast robust systems for real-time trading activity monitoring. Webull has tightened risk controls, offering naked options trading to qualified clients with enhanced risk oversight.

The trend towards same-day options trading reflects the evolving options market, offering investors ways to manage exposure, sell premium, and pursue varied risk/reward objectives. The diversification of trading strategies and end users suggests a healthier investor behavior compared to past market crazes.

As retail investors flock to 0DTE options for their leverage potential and “lottery-like” outcomes, the practice of charging zero commissions and payment for order flow (PFOF) has encouraged increased trading. This trend underscores the appeal of options trading, especially ultra-short-term contracts, despite the potential risks to investors lured by the chance of quick profits.

As Wall Street brokers dive into the retail-options trade, particularly 0DTEs, the balance between seizing market opportunities and managing associated risks becomes crucial. The increasing involvement of retail investors in these trades, driven by the allure of rapid gains, highlights the ongoing evolution of trading strategies in response to market changes and geopolitical risks.