Most of Wednesday was a typical trading day on Wall Street and one that was poised to send U.S. stocks into superlatives. That was until something disrupted the momentum within two hours of the closing bell.
Analysts say the cause, at least in part, of the steep and unexpected decline in the S&P 500 index SPX,
which occurred after 2:00 PM Eastern Time, was tied to so-called zero-day to expiration options, or “0DTEs.” Such contracts have surged in popularity since at least early 2023 and have been likened to lottery tickets for individual investors and to tactical protection for large funds.
The options are relatively inexpensive to purchase and give an investor the right, but not the obligation, to buy or sell a stock or other asset at a specified price before a specified expiration date. Contracts related to the S&P 500 are typically cash-settled, meaning investors with in-the-money positions can get cash payouts or sell them for a profit.
Read: Here’s everything we know about zero-day options, the risky stock market ‘lots’ that fascinate Wall Street and Reddit
In a post on due to the decline of the benchmark index to the zero-day options.
Prior to Wednesday afternoon’s sudden drop, the S&P 500 was close to its all-time high close of 4,796.56, reached on January 3, 2022. Additionally, the Dow Jones Industrial Average DJIA and Nasdaq Composite COMP appeared poised for a 10th straight day. of profits.
Analysts said the overbought environment and thin trading ahead of the year-end holidays may have exacerbated the magnitude of declines seen in all three indexes on Wednesday. The S&P 500 and Nasdaq each finished down 1.5%, while the Dow Jones closed down 475.92 points, or 1.3%. These moves also set a nine-day winning streak for the Dow Jones and Nasdaq.
However, some disagreement remains over what exactly prompted the stock market’s declines on that day.
Rocky Fishman, founder of derivatives analytics firm Asym 500 in New York, said daily 0DTE volume on Wednesday was the highest since early October at $900 billion. But options volume only picked up again after a sell-off in stocks was already underway — indicating that investors as a whole were already in a bearish mood, Fishman said by phone Thursday.
Meanwhile, Daniel Tenengauzer, a New York-based strategic advisor to the financial technology firm known as bondIT, said the broad sell-off in stocks toward the end of Wednesday’s session coincided with the expected launch of a ProShares exchange-traded fund which uses the short-term ‘zero days to expiration’ options on the S&P 500.
Every time an ETF linked to 0DTEs is launched, “the market starts positioning for it” in the form of hedging or selling on the other side, Tenengauzer said. He compared the dynamics to the market setup before a government bond auction, where “you know there is supply coming in and you have to make room for it” by selling in advance.
The stock market resumed its rally on Thursday, with the S&P 500 slowly closing in on its record close and the Dow Jones ending at 322.35 points, or 0.9%.
