What is "end-of-day options"? An analysis of the impact of zero-day options on fluctuations in the US stock market.

The US stock market has recently experienced severe fluctuations, with many traders pointing fingers at "Zero Days to Expiration" (0DTE, referring to options contracts that expire on the same day). However, market experts have different interpretations of this phenomenon, believing it is just one of multiple factors at play.

The Relationship Between Zero-Day Options and Market Crashes

On Wednesday, the US stock market suddenly turned downward during a calm afternoon trading session, catching traders off guard. In the absence of clear market news, several market participants pointed out that a large volume of zero days to expiration (0DTE) trading activity led to a 1.5% decline in the S&P 500 Index (SPX).

On Thursday, the market rebounded, with the S&P 500 index rising by 1%, recovering most of the losses from the previous day. Some analysts believe that this rebound indicates that the previous day's sell-off was primarily driven by technical factors rather than a change in market fundamentals.

Market Fluctuation Mechanism Interwoven with Multiple Factors

Analysts pointed out that multiple factors contributed to this fluctuation: a low trading volume environment at the end of the year, overly concentrated investor positions, while zero date options became a catalyst for accelerating the market downturn.

Nomura Securities strategist Charlie McElligott stated, "This is a warning about the lack of liquidity during the holiday and the low tolerance for trading losses." This perspective reveals the short-term market psychology.

The Market Phenomenon of Surge in Zero-Day Options Trading Volume

Since the beginning of this year, zero-day Options have significantly increased their influence in the market, becoming a true market driver. Their popularity has risen sharply among both retail and institutional investors.

According to data released by Cboe in August, while the overall options trading volume has reached a historical high this year, the trading volume of zero-day options contracts has grown at a pace far exceeding that of other expiration types of options. Currently, these contracts account for about half of the total trading volume of S&P 500 index options.

The Amplification Mechanism of Zero-Day Options on Market Fluctuations

When investors buy a large number of put options on the S&P 500 index (as seen on Wednesday), market makers must hedge by selling stock futures throughout the day to balance the risk.

If the market weakens, market makers typically accelerate selling to protect themselves, and this mechanism may further exacerbate the market's downward trend, as seen in Wednesday's market performance.

Nomura's McElligott analysis points out that bearish zero-day options trading has prompted around $3 billion in stock futures to be sold off. Meanwhile, a large institutional investor's asset reallocation trade (selling stocks and buying bonds) may further increase the stock sell-off pressure.

He stated that investors who were originally optimistic about the stock market were caught off guard by the sudden drop, creating fertile ground for a significant reversal in the market.

Market Interpretation by Trading Experts

Joe Mazzola from Charles Schwab believes that multiple factors have driven this sell-off, and options trading has acted as a fluctuation amplifier.

"The situation that day was: the market liquidity was low, and investor sentiment was tense. Then people realized that everyone was on the same side, and zero-day options trading became the tipping point," Mazzola said.

Future Market Risk Outlook

As the end of the year approaches, the market is expected to maintain low trading volumes, and some analysts are concerned that similar fluctuation events may occur again.

Matthew Tym, the head of stock derivatives trading at Cantor Fitzgerald, expressed concerns that many factors behind the recent sell-off may resurface.

"If the market does encounter negative news shocks, zero-day Options are likely to further exacerbate the sell-off trend," he warned, "we may face extreme situations similar to the flash crash of ten years ago."

This market mechanism reminds investors that in the current high fluctuation environment, understanding the impact mechanisms of zero-day Options and other derivative tools on the market is crucial for grasping risks and opportunities.