Budrigantrade Review-Wall Street in fear of short-term options

Budrigantrade.com - According to two people who are familiar with the situation, there has been an explosion in the amount of equity derivative security trading over the past few months, which has prompted players on Wall Street and a major clearing house to investigate the potential dangers it poses.

Options known as "zero day to expiry" (DTE) are contracts that expire in less than 24 hours. They provide retail and institutional traders with a low-cost but high-risk way to bet on stock price swings during the day. They could be correlated with the price of specific stocks, exchange-traded funds, or indices.

There have been warnings that this kind of option, which gives traders a chance to make bigger bets on the market, could cause a huge selloff.

For instance, JPMorgan analysts (NYSE: JPMorgan) stated earlier this week that this kind of trading can increase stock volatility in the United States, potentially transforming a 5% intraday decline in the S&P 500 into a 25% decline.

Two sources told Reuters that major players in the derivatives market have discussed exposure and risk to the broader market on at least two calls as a result of the possibility of such a selloff.

OCC and FIA confirmed that the Futures Industry Association (FIA), a trade group with major Wall Street players as members, invited OCC to participate in a call on 0DTE at a meeting on March 1. The major Wall Street banks are all FIA members.

The OCC spokesperson stated, "We are following the rise in volumes in these products to better understand any risk management implications for the markets and continue to have an open conversation with our members." The OCC declined to provide additional information regarding the content of its "private calls with clearing members."

As a clearing house, the OCC settles and assurance choices contracts, filling in as a focal counterparty for credit risk.

A FIA representative said that 0DTE was one of the subjects examined last week, portraying the call as standard.

According to one of the sources, in addition to the group meeting with the FIA, the OCC has individually discussed this issue with some market participants.

On one of the calls, the source said that members were investigating possible fundamental gamble, including assuming prime specialists would have the option to distinguish clients' all out openness. The OCC informed this individual that while it did not perceive a significant risk, it desired to evaluate the perspectives of its members and investigate various risk scenarios.

According to the source, the participants who spoke with the OCC determined that the existing safeguards would be sufficient.

According to OptionMetrics data, the daily volume of 0DTE contracts on the S&P 500 (SPX) increased by threefold from approximately 400,000 in January 2022 to approximately 1.2 million in March 2023.

The calls with the OCC show that people in the options market want to know more about a part of the market where both retail and institutional players are trying to make money from changes in the market during the day.

As they get closer to expiration, there is little chance that the value of many 0DTE options will rise. Notwithstanding, little changes in the cost of the fundamental stock or record can make their costs likewise change. Contracts' sellers could face increased losses and a sudden increase in value as a result of a significant intraday market shift.

JPMorgan analysts have estimated that a significant shift in the market could result in $30 billion worth of buying or selling of these options positions, triggering what could be a volatility shock.

Others, on the other hand, stated that such an increase in volatility would be brief and unlikely to pose any systemic risk due to the daily expiration of 0DTE contracts, which restricts the potential for positions to accumulate over time.

Robert Knopp, co-head of the S&P options desk at market maker Optiver, stated, "Many of the volatility-selling strategies we see in this market are in the form of spreads that limit the seller's downside."