Miami-based ETF sponsor Defiance has launched the first Nasdaq-listed exchange-traded fund dealing in zero-day options, duly called the ‘Defiance Nasdaq-100 Enhanced Option Income ETF’.
Under the ticket symbol QQQY, Defiance’s new ETF comes amid an explosion of interest in zero-day option trading. What is all the hype about?
Zero-day options as the new meme stock
Zero-day options (i.e. zero-day-to-expiry (0DTE) options) are a form of the oft-maligned strategy of day trading. They are highly volatile, highly risky, and can be quite expensive when factoring in commissions and spreads.
As with all options contracts, they give investors the right, but not the obligation, to buy or sell a stock, currency, or other asset at a given price before a set expiration date.
The key difference is the expiration date on a 0DTE. Whereas a typical options contract may expire in a week, a month, or even a year, 0DTEs, as the name suggests, expire in less than 24 hours.
This means the 0DTE buyer must either buy or sell – depending on what position they take up – within a day or else forfeit their position completely.
They have been likened to lottery tickets, with high-risk traders hoping to turn a quick profit on intraday volatility.
It’s not hard to imagine masses of retail traders gathering on Reddit or Telegram to plan their 0DTE trading strategies for the day.
Like meme stocks, a not insignificant amount of 0DTE deal flow appears to be coming via retail channels. Also like meme stocks, they have been accused of causing instability in the markets.
This August (a record month for 0DTE deal flow), Goldman Sachs (NYSE:GS) contended that a wave of 0DTE puts caused a 0.4% drop in the S&P 500 in a 20-minute period.
For what it’s worth, the Bank of America refuted Goldman’s thesis.
Either way, 0DTEs are all the rage right now, with the Chicago Board Options Exchange estimating a daily deal flow of half a trillion dollars (whereas Defiance believes the number is a cool $1 trillion).
Jonathan Zaionz, Cboe’s senior derivatives analyst, estimated that 0DTEs have accounted for 43% of all S&P volumes in 2023, with 30% to 40% spearheaded by retail investors.