The indices are now finally confirming each other in their slide, with the last of them, the NASDAQ Composite, throwing in the towel yesterday and making lower Lows on the chart.
Down-trends, specifically primary ones such as the one we’re more likely to enter now, are amongst the most volatile market environments there are. But volatility can be and is a tool to make profits.
Since the exuberant 2021 euphoric market top, marked by Wall Street Bets-style short squeezes in GameStop or AMC, the markets have cooled considerably. 2022 was marked by a steep down-trend, 2023 was a thin and low-volatility up-wards drift, while the popular-with-amateurs crypto trading space has entered a wintry environment.
However, as the resurgence of euphoria around the latest AI bubble has shown, amateur traders have not thrown in the towel, and in their search for the get-rich-quick heaven they have discovered another tool to squeeze money out of minute volatility in the markets – 0DTE options.
Another “special situation”, as Mark Hanna from The Wolf Of Wall Street would say.
Not too long ago almost exclusively a tool for institutional Pros trading thousands of contracts a day, the number of 0DTE option contracts has risen 60% merely in 2022, with an increase of 75% of the small-lot “retail” customers operating these positions.
An option is a contract giving you the right to either buy or sell 100 shares of a stock at a lower (call) or higher (put) price for a certain time window, normally a few weeks or months. The value of that option rises with stock movement, volatility and expectations on them, and drops over time up to the contract’s expiration date.
If you open such a contract on the day the option expires (0DTE option), the fee (premium) to buy that option has dropped relatively, but a sudden onset of volatility in the very limited time left to expiration may explode the value of the contract upwards – known as convexity.
Of course, something like this had to attract the undercapitalized get-rich-quick beginner crowd and catalyze the appearance of niche “educators”.
Most 0DTE trading is done on index options, such as the SPX. In 2023, interest in 0DTE options has risen massively, as they made up roughly 50% of the SPX options volume up to September.
This has been a boon for market makers and professional issuers – but for the amateurs, the chicken eventually comes home to roost.
As for any endeavor in financial markets, very few select people make money consistently – and so it is in 0DTE options. In reverse the vast majority loses money – and so it is in 0DTE options.
95% of amateurs can’t call market direction, spend tons of their already minimal money on buying cheap premium out-of-the-money options and lose the bet. Then they move on to selling options, seeing their income float … initially.
After a while though, their lack of market acumen will have their large positions, which are often soon done on borrowed money from the broker, go against them – lethal options exercises or forced liquidations by their brokers kill their accounts, often owing the broker money.
When will people ever understand that get-rich doesn’t work, and that this time it isn’t different?
There is a way to consistently make money in options – even 0DTE. But the fact that the amateur crowd has descended onto this rather risky niche derivative like the locusts is another sign of the extreme exuberance this market has witnessed not only in 2023, but since the 2020 market explosion.
Signs of the times.
