What Is Volmageddon? Why Record Options Trading Could Risk Another 20% Stock Crash

Topline

A recent surge in popularity in zero-day options contracts could fuel a massive loss for the S&P 500, JPMorgan analysts caution, as the risky short-term bets again gain popularity from investors looking to cash in on the stock market’s volatility.

A trader works on the floor at the New York Stock Exchange on February 5, 2018, the height of … [+] Volmageddon 1.0.

AFP via Getty Images

Key Facts

Zero days to expiration options, often referred to as zero-day options or 0DTE, are puts or calls that expire within 24 hours of purchase, frequently relying upon a massive intraday swing to cash in on the potential gains.

Roughly $1 trillion worth of 0DTE options are bought daily, according to JPMorgan research.

JPMorgan strategist Marko Kolanovic said last month the popularity of these trades could result in “Volmageddon 2.0,” an amalgamation of volatility and Armageddon referring to the spike in such short-term options trades in February 2018, which caused the S&P to slip 4%, its worst month in over two years.

This time around, the impact could be even worse: A 5% intraday decline to the S&P could cause $30 billion in 0DTE options sell-offs and a further 20% decline for the index, JPMorgan’s Peng Cheng wrote in a Monday note.

Crucial Quote

“While history doesn’t repeat, it often rhymes,” Kolanovic warned about the rise of 0DTE options fueling a stock crash comparable to 2018.

Contra

Bank of America analysts pushed back on the potential fallout of 0DTE options, writing in a note last week the trades are “more balanced [and] complex” than a market that is simply one-way bets on rare, single-day swings.

Key Background

Regardless of the merits of same-day options, the market has undeniably become far more prone to significant intraday moves: The S&P has lost or gained 1% or more 20 times year-to-date, compared to just seven instances in the same timeframe a decade ago. Though retail investors helped fuel the popularity of long-shot options bets, it’s largely Wall Street behind the 0DTE options craze: Institutional investors account for about 95% of same-day S&P options trades, according to Cheng.

Surprising Fact

The most popular day for same-day options trades during the three-month period ending last Monday was February 3, when the Labor Department released its monthly jobs report, which typically swings stocks, according to Goldman Sachs analysis.