Nasdaq recently listed a series of new weekly options contracts tracking exchange-traded funds (ETFs) investing in gold, silver, natural gas, oil and long-term Treasuries, which traders can utilize for trading zero-day to expiration (ODTE) options.* Nasdaq’s announcement is notable because the Wednesday expiration date provides traders with a second day each week to take short-term positions on the five non-stock products. Nasdaq already lists Friday weekly contracts on these ETFs.
It’s speculated that through this move Nasdaq is aiming to take advantage of the recent surge in zero-day options popularity and ramping up for continued growth in this expanding market. Are you interested in potentially adding 0DTE options to your portfolio? Read on to learn about some of the key pricing and risk considerations.
Nasdaq and Zero-Day Options
The lion’s share of 0DTE options trading to date has focused on S&P500 options contracts which have expirations – and therefore trading opportunities – on every day of the week. Nasdaq’s newest Wednesday contracts may be great news for traders in non-equity asset classes looking to take advantage of market movements that align with significant mid-week events such as policy statements issued by the Federal Reserve, which typically occur eight times throughout the year on Wednesdays.
Zero-day options offer different benefits than traditional options with longer expiration time limits because they can provide traders with increased flexibility, unique risk-reward profiles, and the ability to react quickly to intraday market news and events affecting underlying prices.
Balancing Risks and Rewards
Nasdaq’s decision to introduce short-term options in new asset classes is expected to bring increased liquidity and trading activity to the exchange platform. The fact that this heavyweight exchange has chosen to add these new listings is strong validation for projected continued 0DTE success in the markets.
However, the growing popularity of zero-day options has also raised concerns about increased market volatility and the potential for heightened risk exposure for traders. For example, gold recently experienced significant volatility in the markets. According to the CME Group, on December 4, the December gold contract rallied intraday to a record high of 2,130 USD an ounce before reversing and trading down to 2,024 USD at the close of the day. Rapidly shifting fundamental and technical dynamics are likely to have had an impact on this swing, which may continue with events leading up to next week’s central bank meetings and the US Consumer Price Index data.
The fast-paced nature of zero-day options requires an elevated level of specialized expertise and tools for quick decision-making, which may not align with the risk tolerance or strategies of all traders. Regulators and market analysts are bound to be monitoring these options closely to assess their impact on market dynamics, volatility and the overall risk profile.
Assessing 0DTE Options Risk
Because they have an abbreviated lifecycle, 0DTE options have unique risk characteristics and require diligent monitoring. While it is important to analyze key factors such as options Greeks, open interest and volume, the sheer speed of those analytics is also very important. While intraday moves may normally be quite muted, the reality is that moves may be seemingly minor until something unexpected happens.
When there is a crisis, things can move rapidly. Thus, you need a degree of speed that you don’t need most of the time. But when you need it, it becomes crucial. Whatever type of analytics you use for short-term options, ensure you can view those in real-time.
In addition to speed, it may go without saying that your pricing and risk analytics need to be precise. Accurate models for zero-day options are crucial to managing intraday volatility and minimizing risk. Best-in-class analytics serve as vital tools, enabling traders to make informed decisions that help them optimize gains and mitigate losses in this high-speed market.
FINCAD Analytics Suite for 0DTE Options
Zero-day options trading hinges on a strategy of taking very short-term views on an underlying’s direction and volatility, essentially betting on the option's in-the-money or out-of-the-money status within a trading day. FINCAD Analytics Suite for Excel aids in this assessment with same-day option pricing and precise risk analysis, including detailed Greek monitoring.
With FINCAD Analytics Suite, 0DTE options can be valued in real-time to a specified millisecond, ideal for making the most up-to-date trading decisions possible.
Want to see firsthand how FINCAD Analytics Suite for Excel can help you manage pricing and risk for zero-day options? Get a 14-day FREE trial here.
* Financial Times. Nasdaq bets on boom in ‘zero day’ options with new contracts (ft.com)