Friday, the Day When Weekly Options Become 0DTE

Faithful readers should know the answer to a trick question that I posed to a recent options conference: “When did the industry first have its first options with zero days to expiration?”

This week I had the privilege of being part of a panel discussing so-called “zero-dated,” or “0DTE” options at a derivatives conference. Although the panel was attended almost exclusively by options professionals, not all of them were able to answer my question: I heard a range of answers, most mumbled, but I did hear one or two quietly say “the seventies.” Indeed, all options become zero-dated upon expiration, and the first options expiration was in the 1973. The industry has been compressing its expiration cycles, not changing the way options trade or settle. We went from quarterly, to monthly, to weekly, to thrice-weekly, then to daily expirations. It was the last move that caused a stir.

Although there are only a handful of daily expiring options, all on key indices and ETFs, there are over 600 options classes that expire weekly. Those include the most popularly traded individual equities. Many in the industry have come to associate upward moves that tend to pyramid upon themselves with 0DTE options. There are many days when we see relentless buying of expiring calls that then get rolled up into the next higher strike as the market moves higher – often with an assist from those relentless call buyers. It’s a feedback loop that works during bull moves. Buy, rinse, repeat. In theory it can work on down days, but speculators tend to be more comfortable trading from the long side.

But it is not realistic to believe that the daily expiring, or 0DTE, options are the culprit.  True, it is usually noticeable in the names that have daily expirations, but this is a pattern that we saw on Fridays even before we had daily expirations. We wrote about the phenomenon in April 2021, yet daily expirations were first listed in late 2022. The techniques haven’t changed, just the ability to use them daily, rather than weekly.

Yet Fridays offer traders the opportunity to try to attempt to play the feedback loops in a wide variety of popular common stocks. We see it today in Nvidia (NVDA). NVDA is perhaps the poster child for this year’s bull run. As we know, megacap tech stocks have led the advance, abetted by enthusiasm over artificial intelligence, and no stock better represents the intersection of those phenomena than NVDA.

Equity markets started the day in a bullish mood, and except for a bit of a breather around 10AM EDT after University of Michigan Sentiment, Current Conditions, and Expectations all came in lower than expected, while 1-Year Inflationary Expectations rose to a higher than expected 4.4%, the positivity seemed pre-ordained. Much of that was reflected in, and abetted by, the continued advance in NVDA. Note the move in the stock from 10:30, after the markets had fully digested and spat out the inconvenient Michigan reports, to 11:10:

That rise was accompanied by a large flurry of call buying. Even before noon, we had over 90,000 contracts of today’s expiring 480 calls trade. For comparison, the open interest on that line was 17,509. Thus, the vast majority of the volume was clearly by buyers opening new positions. But it’s not as easy to roll calls in a name like NVDA as it is in the similarly priced SPY, since NVDA strikes are in $2.5 increments while SPY has $1 strikes. But one can still take their shots with expiring options nonetheless.

It’s too early to know how this will turn out for today’s call buyers. As I write this, we haven’t yet pierced the $480 level that could allow the call buyers to profit. Remember that expiring strikes with significant open interest or volumes on expiration days can act either as a magnet or a slingshot. Much will have to do with the overall tone of the market, which has been steadily improving as I type. But either way, Friday is the day when 0DTE strategies can be employed across a wide range of individual stocks, like it or not.