U.S. small-cap investors will soon have more opportunities to participate in one of the hottest and most controversial options trades of the year.
CBOE Global Markets Inc., the world's largest options exchangewill extend the expiration date of the so-called zero-date option linked to the Russell 2000 index to Tuesday and Thursday. Options expiring in 24 hours or less are currently only weekly.
1. Available on Wednesdays and Fridays, but the S&P 500 is available every trading day.
Catherine Clay, executive vice president and global head of derivatives at the Chicago Board Options Exchange (CBOE), said the new product will allow options traders to replicate daily strategies they already use on other indices. "When they found out what worked in the S&P 500, they wanted to do the same in the Russell 2000," Clay said in an interview. ”
Trading in zero-day options linked to the S&P 500 has soared to record levels this year, and the exchange is looking to build on that success. But the surge in demand has also brought controversy. There are growing concerns that the product will increase market volatility, with some traders blaming the so-called zero-date right for Wednesday's U.S. end on Wednesday.
Rob Hocking, head of product innovation at the Chicago Board Options Exchange (CBOE), said there was a lot of concern when the trading volume of zero-day options started to increase. But he said CBOE takes the time to educate market participants and "educate them about why and how these products are used."
The expanded access applies to Russell 2000 and mini Russell 2000 options and will take effect on January 8. Rival CME Group IncLast year it launched the e-mini S&P 500 cyclical rights and expanded it to cover every day of the week.
Options trading volumes have been soaring, and short-term investment products are becoming increasingly popular. In response, the CBOE has expanded its S&P 500 options offering with weekly and daily expirations, adding Tuesdays and Thursdays in the first half of 2022. Previously, the Chicago Board Options Exchange (CBOE) in the week.
1. Weekly options expiring on Wednesday and Friday were successful.
Zero-date options products attract investors at a time of growing unease, allowing them to hedge against every market move, from employment reports to gross domestic product (GDP) figures. Offering more expiration dates allows traders to open and exit positions on faster timeframes. Traders also settle positions on a daily basis instead of taking risks overnight.
But including JPMorgan Chase & CoSome analysts, including Marko Kolanovic, have warned that the product's popularity could be a market shock. The Chicago Board Options Exchange, citing a study conducted earlier this year, said there was little evidence that the buying and selling of these derivatives was destabilizing the underlying market.
The Russell 2000 Index is a benchmark for measuring the performance of small-cap stocks in the United States. By increasing the expiration dates for Tuesday and Thursday, investors will be able to manage their exposure to U.S. small-cap stocks and diversify their investment strategies around market events more precisely.
Hawking said the Russell 2000 has similar characteristics to the S&P 500, both are cash-settled indices. "We wanted to be able to offer the same optionality across different benchmarks. ”
*Investors are choosing options, believing them to be a relatively cheap way to bet on **. Options give the holder the right to buy and sell**. Institutional investors are also profiting from this, as options can provide a lower-cost way to limit losses when the market is volatile.
By the end of 2023, total U.S. options trading volume is expected to hit a new year-on-year high, surpassing the 10.3 billion contracts in 2022 and breaking the record for the fourth consecutive year, according to CBOE data covering the entire market. This growth is due in part to the trading of short-term US index options.
Options contracts expiring one day or less accounted for about 36% of total U.S. index options flows in 2023, compared with 15% in 2020, according to the Chicago Board Options Exchange. For options linked to the Russell 2000 Index, contracts expiring in one day or less accounted for 17% of total volume. Clay and Hawking expect trading volume to increase on Tuesday and Thursday.
The trend in this industry is towards more nuanced and frequent exposures. "So we're exploring more ways to respond to that demand." ”