Zero-day options are now being traded on various markets, including the Treasury and Commodity markets, as exchanges like Nasdaq aim to replicate the success of US stock index trading.
Nasdaq listed this week a series of new option contracts that track some of the most popular ETFs investing in gold and silver, natural gas, oil, and long-term Treasuries.
Investors can buy or sell assets at a set price and date. Zero-day trading is the act of trading a contract before it expires. It can be used as a hedge or to make speculative bets on extremely short-term movements in the market.
During the coronavirus outbreak, zero-day trading of options linked to the S&P 500 index grew in popularity. The surge was initially viewed by some analysts as a temporary phenomenon, driven by retail speculators. However, it sparked concerns by regulators and other experts that this could lead to systemic risks by exacerbating market movements.
Nasdaq’s move shows that exchange groups believe zero-day trades will continue to be a popular trend with various assets.
After regulators approved Nasdaq, many executives in the industry believe that other US exchanges will also start offering ETFs without a specific index.
Greg Ferrari, Nasdaq’s head of exchange management, said that investors are looking for ways to position themselves around risky events, such as Federal Reserve Meetings.
By adding Wednesday expiration contracts to existing Friday expirations, the new listings will make zero-day trading easier. Investors can save money by adding additional days to the week that contracts expire.
Ferrari mentioned that Nasdaq plans to introduce additional options in the future, which will expire on different days every week, if they are well-received.
He said that when investors want to manage their exposure precisely, they need a product with a set expiration date.
In August of this year, zero day options made up over 50% of the total volume of S&P500 options. This is a significant increase compared to only 5% in 2016, according to the exchange group Cboe.
Exchanges and market-makers responded to claims that zero-day trading may cause volatility. They contradicted the common belief that it is mainly gambling for regular retail traders.
Ferrari said that this phenomenon is a boon to all investors. There are many different uses for short-dated option. . . All evidence indicates that the risk profile is controlled by the deep liquid ecosystem. “That’s why we took this measured step.”
The Securities and Exchange Commission has approved the new expires.
Recent moves by Nasdaq rival Eurex (owned by Deutsche Börse) suggest that the zero-day trend is also starting to gain momentum throughout Europe . Eurex introduced daily expires on the Euro Stoxx 50 Index in August. Last week it introduced similar options linked to Germany’s DAX benchmark index.
Liam Smith is the head of US Corporate Strategy at trading firm Optiver. He said that “having a more granular way to express your opinion [through expires] makes perfect sense.”
Optiver has backed the idea of expanding their services to include zero-day options trading associated with specific stocks. However, he said this move would be complicated and unlikely to happen before the end next year.