Share ratio of 50%! "Zero-day options" make a comeback

The resurgence of zero-day options, also known as "end-of-day options," may exacerbate the already turbulent stock market and potentially lead to a market crash similar to the one five years ago.

According to JPMorgan Chase, the trading volume of zero-day options has been reaching new historical highs and recently accounted for half of all S&P 500 index options trading volume.

JPMorgan Chase's report, released on Monday, indicates that the "prosperity" of zero-day options seems to be its own affair, primarily attracting high-frequency traders and retail investors. Therefore, it does not significantly impact the trading volume in other areas of options trading (except for short-term options on the SPDR S&P 500 ETF).

End-of-day options are option contracts that expire and become invalid on the same trading day. This means that the options have a maximum of 24 hours until expiration, and investors engage in rapid buying and selling of these options. Due to the extremely limited expiration time, the prices of these options are cheaper than options with longer expiration dates, but they also offer higher leverage, allowing investors to control a market value of $1,000 with approximately $1.

The significant leverage brings substantial profits and entices retail investors to speculate, leading to the popularity of end-of-day options on Wall Street last year. However, the substantial leverage also means significant risks, which quickly sparked intense discussions in the market.

According to an earlier article by Wall Street CN, Marko Kolanovic, JPMorgan Chase's Chief Market Strategist and Global Head of Research, warned that zero-day options trading is experiencing explosive growth and could potentially cause a market disaster at a level similar to early 2018. This relatively opaque financial corner is a time bomb lurking in the market, which could trigger a market crash similar to "Volmageddon 2.0."

In February 2018, a volatility-tracking fund was sold off as the market approached the redemption line. This crisis led to a sharp decline in the Dow Jones Industrial Average and the S&P 500 index, known as "Volmageddon" in the market.

Compared to JPMorgan Chase, Bank of America has a more optimistic attitude. Nitin Saksena and Benjamin Bowler, equity derivatives strategists at Bank of America, countered that zero-day options would not cause the so-called "Volmageddon 2.0," and the reality behind these options is far more nuanced than "Volmageddon 2.0."

During the stock market downturn in early August, Goldman Sachs and UBS found that there was a surge in bearish zero-day options trading, leading to massive sell-offs by investors and exacerbating the decline in the US stock market. In addition, Nomura and Citigroup have expressed concerns about the sharp increase in zero-day put options.

According to the latest report from JPMorgan Chase, the recent launch of the first batch of ETFs based on zero-day options may further exacerbate the risk of a market crash.

Recently, fund company Defiance has launched two actively managed funds that generate returns by selling put options on the daily S&P 500 and Nasdaq 100 index options.

This strategy is inspired by the recent popular ETF strategy based on option income, with the most typical example being the JPMorgan Equity Premium Income ETF (JEPI), which has raised nearly $30 billion in assets over the past three years.

It is worth mentioning that Defiance has chosen the trading code JEPY for its S&P 500 0DTE fund, seemingly attempting to imitate JEPI. These new ETFs currently have only about $15 million in assets, so their impact is negligible. However, if they raise a significant amount of assets, it may exacerbate the tail risk brought by 0DTE options.