(Bloomberg) -- A surprising thing happened during the early August stock convulsions: The one corner of the market most suited to riding short-term moves fell unusually silent.
Trading of options with zero days to expiry, or 0DTE, slumped last Monday as the selloff swept global equities. About 1.1 million such contracts tied to the S&P 500 changed hands, roughly 30% below the one-month average, according to analytics firm SpotGamma.
At the same time, the number of transactions in longer-tenor derivatives jumped, reducing 0DTE’s share of the total volume in S&P 500 options to 26%. That was the lowest level since June 2022 — not long after exchanges extended certain expirations to all weekdays, unleashing the zero-day boom.
The brief retreat — activity has since rebounded — adds a new twist to the ongoing debate about these controversial tools, which have proliferated as a means to gamble, hedge or juice returns. Their rapid growth has sparked concern they could threaten market stability, but last week’s pattern suggests investors are quick to throttle back when turmoil hits.
“0DTEs take a back seat to other option tenors when market participants get concerned that more systemic/structural fundamental or macro risk is returning,” said Nitin Saksena, the head of US equity derivatives research at Bank of America Corp. “0DTEs are less than optimal for hedging that type of risk.”
Far from helping fuel the turmoil as some had feared, 0DTE likely played a limited role in the recent drama, according to BofA. When the Cboe Volatility Index spiked to more than 65 in pre-market trading last Monday, zero-day contracts accounted for only one quarter of all S&P 500 options exposure, according to one of the bank’s measures.
“Some market commentators have pointed to SPX 0DTEs as an important contributor to the rise in equity volatility,” Saksena and his colleagues wrote in a note. “This is largely misguided or at minimum greatly overstated.”
By last Thursday, trading in 0DTE had recovered to make up 49% of all S&P 500 options volume, in line with this year’s average.
The temporary drop in 0DTE activity chimes with previous stress events where rapid selloffs appear to have deterred trading. In 2023, their relative volume also dipped during the regional-banking crisis, and it faded again amid an equity selloff near year end.
There are signs that retail investors — who drive as much as 40% of 0DTE volumes, according to Cboe Global Markets — pulled back last Monday. At online broker Moomoo Technologies Inc., 0DTE’s share of S&P 500 options trading was about 10 percentage points below the average in the previous month.
Justin Zacks, vice president of strategy at Moomoo, reckons day traders may have sought protection from the turmoil in options expiring in the month ahead, which will include events like Nvidia Corp. earnings.
“Put buying may have been more spread out among various tenors and not solely focused on hedging market moves specifically on just August 5th,” Zacks said.
Another cohort that may have shied away from zero-day options is high-frequency traders. These players, who measure trades in fractions of a second, have flocked to 0DTE to profit from volatility discrepancies between index and single-stock contracts, according to Brent Kochuba, founder of SpotGamma.
“When the market is fairly stable you can play the predominant relationship: long Nvidia vol and short S&P 500, for example,” he said. “But when everything is crashing you can’t count on the normal relationships prevailing. The arbitrage turns off.”
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