Cboe Global Markets is a leading provider of market infrastructure operating in 26 markets globally. It offers trading in options, futures, equities, FX, digital assets, and more for institutional and retail investors. The company has long been an innovator in financial products.
Jonathan Zaionz, Senior Derivatives Analyst at Cboe Global Markets, explained what 0DTE means, how to make the best use of 0DTE options, and the kinds of traders utilizing them. Though they have long been used by institutional players like hedge fund managers, they are becoming more popular with an increasingly sophisticated retail market.
Jonathan Zaionz, Senior Derivatives Analyst at Cboe Global Markets, explained what 0DTE means, how to make the best use of 0DTE options, and the kinds of traders utilizing them. Though they have long been used by institutional players like hedge fund managers, they are becoming more popular with an increasingly sophisticated retail market.
Category
🗞
NewsTranscript
00:00 Welcome, it's Michael Murray with Benzinga. I'm joined here today by Jonathan Zayon, Senior
00:06 Derivatives Analyst at Cibo Global Markets. Jonathan, always a pleasure to be joined by
00:10 Cibo. How are you?
00:11 Thank you for having me, Michael. Good morning.
00:12 Outstanding. It's a pleasure to have you here. Very excited to be talking with Cibo Global
00:16 Markets once again and talking about zero DTE, which is our topic for today. What exactly
00:21 is zero DTE and how exactly does it function?
00:24 Yeah, absolutely. So zero DTE stands for zero days to expiry. It basically just refers to
00:30 an options trade that occurs on an option that's expiring that same day, which typically
00:35 is at the end of regular trading hours, which is 4 p.m. Eastern. Most of these options existed
00:41 before this day. Typically, they've been listed weeks, months, potentially even a year ago.
00:47 But zero DTE just stands for trading it on that day. It wasn't necessarily listed that
00:52 day. However, we've been seeing the volume trends that everyone's talking about, how
00:56 most of the volume is centered around this day. We've actually seen about 45 percent
01:02 of total SPX volume happening on the same day of expiry.
01:05 Understood. And who are the largest users of zero DTE and who is this the best fit for
01:10 in terms of investor or trader profile, for example?
01:13 So I think there's a use case for zero DTE for many different types of investors and
01:18 traders. I wouldn't say that there's one or even a group of people who it's the best for.
01:23 For example, some of the largest groups of people we see using these options are institutional
01:28 investors. You have your asset managers, your registered investment advisors. They potentially
01:33 could be selling premium to harvest it in the very short term. They could be using it
01:38 to delta hedge their larger portfolio positions without really wanting to unwind a lot of
01:43 their longer positions. And of course, we're seeing a lot of participation on the retail
01:47 end of things as well. You know, retail traders, I'd say, are as sophisticated as ever when
01:53 it comes to options. We've been seeing a nice breadth of strategies with retail.
01:57 Got it. And what strategies are retail traders using and why? How does zero DTE kind of relate
02:02 and tie in here to what those strategies are?
02:04 For sure. So we see retail traders using our SPX product a lot. We also see them using
02:10 XSP, which is the mini SPX product. It's a notional size of one tenth of the size of
02:16 SPX. It's the same size as SPY, but you still get all those benefits, you know, the cash
02:21 settlement, European settlements, etc. as you would get with SPX. So one of the largest
02:27 strategies we're seeing both in SPX and XSP when it comes to zero DTE trading with retail
02:33 is selling call and put spreads. So a call spread or selling a call spread specifically
02:39 is basically selling an out of the money call and then buying a further out of the money
02:43 call to kind of hedge yourself should the market rocket up one day. You only would participate
02:49 in the losses of the strike distance between the short and long strike that you choose
02:54 minus whatever premium you received initially to enter that position. And then on the flip
02:58 side of that, you have put spreads as well, which function the exact same way. So we actually
03:03 see, you know, similar usage between call spreads and put spreads. We find that a lot
03:08 of the retail zero DTE volume is non-directional on average. So, you know, you'll have someone
03:15 who thinks that the market's going to go up after the Federal Reserve increases interest
03:19 rates. So maybe they would sell a put spread to get some premium. And then as the market
03:24 goes up, hopefully both of their puts would expire worthless. On the flip side, you may
03:28 have someone that thinks the market's going to go down. So they would sell a call spread
03:32 to harvest premium in the beginning. And then as the market hopefully goes down for them,
03:37 their calls would expire worthless as well. Another popular strategy we see that's called
03:42 an iron condor. It's actually a combination of a call spread and a put spread. That's
03:48 something that people typically enter if they think, or let's say they sell it. So you sell
03:53 a call spread and a put spread if you think that the market is going to stay within a
03:57 specific band. So, you know, if you're seeing good premium opportunity on this Federal Reserve
04:02 day, you know, and you want to collect some premium right now, and you think that the
04:07 market reaction is going to be pretty muted, you could sell this iron condor. Typically,
04:13 you know, maybe you get a couple bucks for a five point wide iron condor, 50 basis points
04:18 out of the money or something like that, just as an example. And then as the market hopefully
04:22 doesn't move for you on your trade, you would just get to keep your $2 in premium and that's
04:26 it. On the flip side of that, we see people buying iron condors a lot. So buying iron
04:31 condors are a good way to express that. I think there will be a lot of volatility, but
04:35 I don't really want to pay up for a straddle, which is just buying a call and put at the
04:39 money or a strangle buying a call and put out of the money. So I can actually receive
04:43 a discount to the overall package price by selling these shorter legs at the end of it.
04:48 So, you know, like I said, retail is as sophisticated as ever. The strategies we're seeing from
04:54 them are impressive to say the least, and they're finding many different use cases for
04:58 this product.
04:59 Thanks for the in-depth minning. And how was the liquidity in SPX Zero DTE versus other
05:03 Zero DTE products?
05:04 For sure. So SPX is one of, if not the most liquid options products in the entire world.
05:10 It has a robust set of many different market makers that compete to really offer world-class
05:16 liquidity on a regular basis, both in terms of tight bid-ask spreads and sufficient bid
05:21 and ask sizes up at any given time. SPX Zero DTE specifically, given there's such a focus
05:27 on Zero DTE, and that's about 45% of the volume, you know, we've been hearing from a lot of
05:32 the market makers that they are having a special focus on Zero DTE. You know, whether that's
05:38 putting extra traders on the desk or having your own desk for Zero DTE, whatever it is.
05:44 But as a result of that, we see that world-class liquidity. Typically you'll see, let's say
05:48 your 50 Delta and below options on Zero DTE quoted at 5 or 10 cents wide, which keeping
05:55 in mind SPX is 10 times the size of SPY, which is probably the second most popular Zero DTE
06:02 product. And if SPY are a penny wide, that's sorry, if SPX were 5 cents wide, that's basically
06:09 the equivalent to SPY being half a penny wide, which of course it can't be. So the liquidity
06:15 we're seeing is extremely impressive. And you know, there's dedicated teams at SIBO
06:20 where we're working on really improving that, improving the customer experience as much
06:24 as we can.
06:25 Absolutely. And a final question for you, Jonathan, why do retail traders seem to prefer
06:29 Zero DTE over longer term maturities?
06:31 Yeah, absolutely. So short dated options in general or Zero DTE more specifically offer
06:37 really inexpensive ways relative to longer term options to express views tactically around
06:43 the market. We find that a lot of people use these typically complimenting their longer
06:47 term strategies or longer term portfolio. You know, I mentioned the example before about
06:53 a Federal Reserve announcement day where you believe the market's going to fall. Instead
06:59 of selling out of your long positions, let's say you own a bunch of ETFs, you're long in
07:03 the market for your long term portfolio. Instead of selling out of those and paying the trading
07:07 costs to do so and probably realizing gains and needing to pay taxes as a result of that,
07:12 you could just hedge yourself with a Zero DTE put, which is relatively inexpensive.
07:18 I gave the example a couple of weeks ago for a Fed day that happened a few months ago.
07:23 The market opened at $4,000. The at the money put for Zero DTE cost $26. And the traditional
07:31 Friday expiry, which was two days later than this cost, I think it was $42. So significantly
07:38 more expensive to hedge yourself longer term, especially given that the risk over those
07:43 three days was really concentrated around that Fed announcement. So it's just a very
07:49 efficient way to do that. On the flip side, there's people who are willing to sell these
07:53 very short dated options for premium. They're the ones essentially selling the market insurance
07:59 for that day. People like doing that instead of over the longer term, they like doing it
08:04 on the shorter term as they can do it more often. They find out day of really if they're
08:10 selling that day was successful or not. And over the long term, they should be harvesting
08:14 the volatility risk premium that exists in the marketplace. So while longer term maturities
08:20 do have many use cases and their volume really has been increasing significantly as well,
08:26 there's definitely a lot of interest in Zero DTE from all types of participants, but definitely
08:30 that would include retail participants.
08:32 Outstanding. Now, Jonathan, of course, before we close to, we want to mention that you can
08:36 learn more about Zero DTE by downloading Cibo's free Zero DTE white paper. That's at Cibo.com/ZeroDTEwhitepaper.
08:44 Thank you very much for taking the time. We really appreciate all the insights and making
08:47 this quick and easy to understand. Thank you very much for joining us.
08:50 For sure. Thank you so much for having me. Appreciate it.
08:59 ♪ I'm a creep ♪