Cboe to mull zero-dated options for Europe next year

“For zero-dated options, we’re learning from our experience in the US when we look at our European roadmap,” said Cboe president Dave Howson. “That is something that we’ll begin to look at in 2024.”

Zero-dated options expire on the day they are traded. The option is not newly created, but one that is coming up to its expiry date.

Cboe began offering short-dated options for its S&P 500 product last year, when it extended expirations to include Tuesday and Thursday, filling out the week with contracts that roll over each day.

Cboe also runs several European trading venues for equites, and has been expanding its derivatives marketplace on the continent, which it launched in 2021.

In November, the exchange plans to roll out single stock options in Europe. For now, the plan is to have traditional expiries — weekly and monthly — but Howson said short-dated options could be on the horizon for next year.

Jonathan Zaionz, senior derivatives analyst at Cboe, said the exchange initially launched zero-day options because of demand from institutional investors.

“People wanted to be able to roll their cover positions every single day instead of every other day or needing to proxy Tuesday and Thursday with an over-the-counter trade,” he said.

So far this year, same-day expiries have made up 43% of the volume of S&P 500 options at Cboe. In August, nearly half of the roughly three million contracts traded daily were zero-dated.

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The phenomenon is not limited to one exchange, however. Crosstown rival CME has also seen a huge increase in short-dated contracts.

The exchange said volume for its ‘mini’ S&P 500 options contract is up 37% this year. Short-dated contracts make up the majority of the volume, with zero-day trading accounting for 27% and 1-5 day expiries making up 32%.

A big driver for institutional interest in zero-dated options is the ability to hedge event risk such as interest rate hikes, company results and unexpected events like extreme weather.

“Investors are becoming more sophisticated and are now much more active in terms of managing their positions,” said Paul Woolman, global head of equity index products at CME. “The other side are those willing to take on event risk in exchange for premium. People are just harvesting premium over a short period of time.”

Zaionz added that while the exchange developed zero-day options for institutional investors, they have been adopted more broadly by all participants.

“We’re not just seeing our larger institutional client getting utility out of these. We’re seeing retail and hedge funds [too]; it’s across the spectrum.”

Adding to the pile

Both exchanges said full coverage of the week has not weakened demand for traditional or long-dated options.

“The additional listings have been additive to the complex, rather than cannibalising the existing volumes,” said Woolman.

“We still see the love for the traditional third Friday, which is growing also. I would characterise this as absolutely additive to the overall ecosystem,” said Cboe’s Howson.

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There have been some concerns that the surge of zero-day options could lead to price swings in the underlying asset, but Zaionz said Cboe hasn’t seen “the tail wagging the dog.”

“We see no evidence of options driving the market.”

He added that the market is quite balanced, with a nearly equal amounts of long and short trading.

“Once you net out the buys vs sells, calls vs puts across all the different strikes, it’s a de minimis amount of net impact to the marketplace,” Zaionz said.

No signs of stopping

Traders in Europe need not to wait until next year to get into zero-dated options on this side of the Atlantic.

Eurex became the first exchange in Europe to join the trend when it launched zero-day options for the Euro Stoxx 50 on 28 August. On its first day, 1,330 contracts were traded, and by the week’s end it reached over 30,000.

And the push for different expiries is not limited to options in equities. The boom is spilling over into asset classes. CME says volume in options for both its interest rate and agricultural products were up 18% and 33% respectively.

In July, it added Monday and Wednesday closes to its Friday weekly oil benchmark options for WTI. In just over a month, 100,000 contracts have already been traded under the new expiries.

To contact the author of this story with feedback or news, email Jeremy Chan