Latest news with #GarrettDeSimone
Yahoo
07-05-2025
- Business
- Yahoo
This zero-day options craze could finally be coming to popular stocks like Nvidia and Tesla. Here's what to know.
Any option due to expire at the end of a session is considered a 0DTE contract. Technically, every option becomes a 0DTE on the last day of its life. 'They're not pure 0DTEs in the sense that they're not listed every day, but it's getting pretty close,' Garrett DeSimone, head of quantitative research at OptionMetrics, told MarketWatch. Although a Nasdaq executive declined to comment on the exchange's plans, traders and industry experts who spoke with MarketWatch said that, if all goes well, contracts expiring on Tuesdays and Thursdays could soon follow. Currently, options tied to individual common stocks only expire on Fridays, while contracts tied to some stock-market indexes and highly liquid ETFs have more frequent expirations. 'It's probably been a long time in the making,' Scott Bauer, CEO of Prosper Trading Academy and a former floor trader on a major options exchange, told MarketWatch. In a filing published late last week, Nasdaq Inc. officially asked the Securities and Exchange Commission for permission to expand offerings of option contracts tied to a handful of individual stocks. If the SEC signs off, the exchange would be allowed to list options tied to a select group of stocks that expire on Mondays and Wednesdays, giving traders two more opportunities per week to trade option contracts on the edge of expiration. But after a long wait, they could soon be coming for popular stocks such as Nvidia Corp. NVDA and Tesla Inc. TSLA During the trading week, investors have been limited to trading 0DTE contracts tied to stock-market indexes like the S&P 500 and a handful of popular ETFs, including the Invesco QQQ Trust. A surge in trading of so-called 'zero days to expiry' — or '0DTE' — options has contributed to an options-market boom over the past few years, drawing in both sophisticated investors and amateur speculators. Story Continues Traders who spoke with MarketWatch have said the appeal of these contracts lies in the small chance of an outsize gain. If the market pushes them into the money before they expire, it could lead to a large windfall for a trader who had bought them minutes or hours earlier. Back in 2022, popular exchange operators like Cboe Global Markets expanded offerings tied to the S&P 500 and a few popular ETFs to allow traders to trade 0DTE contracts every day of the trading week. The change helped accelerate a boom in options trading that had begun shortly before the COVID-19 pandemic. The average daily trading volume in these extremely short-dated contracts has been climbing steadily since. 0DTE volumes in S&P 500 index options hit a record during the first quarter of 2025, according to Cboe data. A Cboe analyst estimated that roughly 50% to 60% of the average daily activity in S&P 500 0DTE contracts involves amateur individual investors, although the exact share is difficult to determine precisely. - CBOE GLOBAL MARKETS Their rise has coincided with a surge in activity across the broader U.S. equity-options market. According to the Options Clearing Corporation, the industry's main clearinghouse, more than 12 billion contracts changed hands in 2024, setting a record for the fifth year in a row. It appears another record could follow in 2025, with the industry already on track to top 14 billion contracts traded, according to Henry Schwartz, vice president of market intelligence at Cboe. - CBOE GLOBAL MARKETS 'We're working closely with everybody' The SEC has up to 240 days to approve or deny Nasdaq's request once the filing is published in the Federal Register, which had not yet happened as of Tuesday morning. A representative for the SEC didn't return a request for comment from MarketWatch. Once approved, these options could start trading within days. Nasdaq's decision to request the change was the culmination of a lengthy process by exchanges, brokerage platforms, market makers and other options-industry players. The goal was to figure out the best way to introduce more short-dated contracts tied to shares of individual stocks in a manner that would minimize risks for the industry and its customers. Ultimately, the exchange decided that Monday and Wednesday contracts wouldn't be listed on any day when the underlying company is due to report quarterly earnings. This should help to limit the chances that volatile swings in stocks after the closing bell could complicate trade settlements, a Nasdaq representative said. 'We're working closely with everybody to make sure we're doing this in a safe and responsible way,' said Greg Ferrari, a senior vice president at Nasdaq within the market platforms division. The changes proposed by Nasdaq would only allow Monday and Wednesday expirations for a handful of stocks and one additional ETF. As of January 2025, only contracts tied to Nvidia, Tesla, Apple Inc. AAPL, Microsoft Corp. MSFT, Broadcom Inc. AVGO, Alphabet Inc. GOOGL, Meta Platforms Inc. META and Inc. AMZN would be eligible for the Monday and Wednesday listings, along with the Financial Select Sector SPDR Fund ETF XLF. 'Lottery tickets' Options-market activity has been trending toward shorter-dated contracts for years, said OptionMetrics' DeSimone. At the same time, the advent of free-to-trade electronic brokerages has helped inspire a new generation of amateur individual investors to try their hand at options trading. Making it easier to trade 0DTE tied to individual stocks could accelerate both of these trends, DeSimone said. While institutional players still dominate index options, individual traders are more active in the single-stock space, DeSimone said. DeSimone cautioned that anybody interested in trading these products should keep their risk profile in mind. Some in the industry have likened 0DTE contracts to 'lottery tickets' that offer a small chance of a large payout, and a high likelihood that the contract will expire worthless. JJ Kinahan, CEO of IG North America, parent of brokerage tastytrade, pushed back against this characterization, calling it hyperbolic. He said many investors trade 0DTE options as part of spread strategies involving more than one contract, allowing them to more precisely manage their risk. Nasdaq and others have said that 0DTEs can help large traders more tactically manage their risk. 'I think people are excited for the opportunity, but again I think we'll need to do some more education regarding exercise and assignment risk,' Kinahan said. 'We have to continue to educate as to what the risks of these are, especially after the close.' Most Read from MarketWatch
Zawya
06-03-2025
- Business
- Zawya
Sinking S&P 500 correlation spurs dispersion trading bonanza – and risks: IFR
US stock markets have delivered a trading bonanza for investors betting on dispersion – a complex derivatives strategy that profits from share prices heading in different directions – after a breakdown in the long-held dynamic of equities moving largely in lockstep. The question is whether these trades could now come unstuck amid signs that volatility is on the rise again across US markets. S&P 500 correlation recently hit its lowest level in 30 years, according to UBS, as gains from sectors like healthcare and consumer staples offset a stuttering performance from the benchmark's mega-cap technology companies. That unusual backdrop has encouraged investors to pile into dispersion trades, bankers say, which have produced meaty returns thanks to a sustained rise in single-stock volatility. It has also prompted warnings from analysts about rock-bottom correlation levels often preceding wider market selloffs – a scenario that could upend some of these increasingly crowded positions. Dispersion trades are now facing a real-life stress test as broad-based market volatility has increased in recent sessions amid mounting concerns over US economic growth and Donald Trump's administration imposing tariffs on imports from Mexico, Canada and China. 'As we've seen the profitability of the dispersion trade go up, we've seen more crowding,' said Garrett DeSimone, head of quantitative research at data provider OptionMetrics. 'One of the issues is that [dispersion] does carry a pretty significant left tail [risk], similar to any short vol position. If you get a spike in correlations, this trade is going to blow up," he said. "We saw the beginnings of that last August,' he added, referring to the day Wall Street's 'fear gauge', the VIX, surged to a four-year high of 66 points following a more than 12% drop on August 5 in the Nikkei 225 index of Japanese shares. A sustained decline in S&P 500 correlation over the past two years has helped keep headline equity volatility subdued – at least until recently – even as individual stock prices have been moving in wildly different directions. The VIX, which measures the price of S&P 500 options, only briefly flickered above 20 points on January 27 – the day that concerns over China's DeepSeek AI programme wiped US$1trn off the value of US tech stocks. That's because gains from other sectors dampened the effect of the tech meltdown on the S&P 500, which only fell 1.5% that day, as healthcare, real estate and financial stocks rose. Perfect backdrop The diverging fortunes of different industries and companies has provided the perfect backdrop for dispersion, first popularised in the early 2000s but which lost its allure in the following decade when central banks quashed volatility through quantitative easing programmes. It's been 'an exceptionally good environment for anyone running a dispersion book,' Kieran Diamond, volatility strategist at UBS, said in an interview with IFR a few days before the recent market selloff. 'The entry levels for dispersion are elevated, but these trades remain profitable and we continue to see strong appetite from people to do that.' Dispersion trades assume a variety of different flavours but typically involve taking a short volatility position on an index like the S&P 500 through selling options, while taking a long volatility position on individual stocks within that index by buying options. These bets pay off as long as the individual stocks prove more volatile than the broader index. Once the preserve of specialist hedge funds, banks have created and sold huge volumes of pre-packaged 'quantitative investment strategies' in recent years that do this for investors, bringing dispersion to a much wider audience. 'The major change is banks offering QIS strategies that have democratised access to dispersion,' said Julien Turc, head of the QIS lab at BNP Paribas. 'You no longer need to be a specialised hedge fund with all the necessary traders and infrastructure to do this trade." Even as dispersion investors have been making hay this year, some strategists warn that the prevailing market dynamic could also be a harbinger of looming danger. Bank of America equity derivatives strategists wrote in a recent report that 'record low' correlation had kept a lid on S&P volatility and left it 'exceptionally sensitive' to any exogenous macro shocks that cause stocks to return to moving in lockstep. Index volatility would triple if stock volatility and correlation reacted like they did during the notorious collapse of hedge fund Long Term Capital Management in 1998, BofA said. Diamond said extremely low correlation levels could be seen as a sign of complacency around macro risks. 'Correlation getting down to very low levels has historically been a precursor to volatility rising and weaker returns in equity markets,' he said. 'Our house view is that there are meaningful downside risks to the US growth outlook, but people are trading as if it's a micro market, purely focusing on sectors and stocks. That can change very quickly, as we saw last summer.' Correlation shock Dispersion traders will be sitting a little less comfortably following recent market moves. Correlation usually jumps – and dispersion strategies founder – when there is a structural shift that causes stocks to sell off en masse. The S&P 500's main subsectors have all fallen in the wake of Trump's tariff announcement and had wiped out the index's post-election gains as of Tuesday's close – and pushed the VIX back above 20 points. Three-month implied correlation has roughly doubled since late January to 22%, according to Cboe, the highest level since September but still far below the roughly 50% watermark two years earlier. "When you get a sustained period of higher correlations, and you don't get this immediate mean reversion of the VIX, that's when you'll start to see the dominos fall," said DeSimone. Some warn that the most common approach to dispersion, known as 'vega-flat', is particularly vulnerable to a sustained rise in correlation. These strategies tend to be more profitable because they involve selling larger amounts of index options, which generate premiums, but that feature also leaves them vulnerable to a blow out in market-wide volatility. 'When correlation is low, index options are relatively cheap versus single names, so why sell them at a low price?' said Turc. 'Gamma-flat' strategies, which involve selling less index volatility, are 'more prudent", he said. Prior to the recent selloff, one senior bank trader said entry points for dispersion trades had been "probably at one of the most challenging levels over the past decade". '[People have been] wary of correlation normalising and that leading to significant losses,' the trader said.
