Zero-day options are quietly capping S&P 500 rallies

A new wave of ultra-short-dated option trading is increasingly shaping how the S&P 500 moves during the day, and analysts say it may be putting a ceiling on stock market rallies, Bloomberg reports. Zero-day options and other one-to-five-day contracts have exploded in popularity this year, turning what used to be niche trades into one of the biggest forces in US equity markets.

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A flood of daily option-selling is changing intraday behavior: Investors have been selling more short-dated options to collect steady premiums. These trades are designed to profit if markets stay in a narrow range, but they also create mechanical pressure in the underlying index.

The last 30 minutes of trading are becoming a pressure point: Hedging flows spike as options approach expiration near the closing bell. On 24 October, dealer gamma peaked at about USD 90 bn roughly 10 minutes before market close. At that moment, even a 0.1% move in the index would have forced around USD 10 bn in hedging flows, according to UBS estimates.

Some see trading opportunities in these distortions, others aren’t convinced: The growing influence of short-option strategies has encouraged some traders to buy one-day options at the close and sell them at the next morning’s open, hoping to exploit overnight gaps. But skeptics warn against overstating the importance of any single strategy. “Of the 25 or so different things that are pushing markets in different directions, this is one of the 25,” said Susquehanna’s Chris Murphy. “It gets more attention than it deserves.”

And the sustainability question remains open: Many of these trades rely on stable, low-volatility conditions — something that rarely lasts forever. “Any systematic short-option strategy generally harvests premium pretty well until a high volatility environment realizes and then it kills the trade via convex losses,” said Garrett DeSimone of OptionMetrics.

MARKETS THIS MORNING-

Asian markets are mostly in the red in early trading this morning as traders adopt a cautious approach ahead of a busy week for earnings. Japan’s Nikkei, the Shanghai Composite, and the Hang Seng are all down 0.5%. Meanwhile the Kospi is in the green, up 1.7%.

THE CLOSING BELL: TADAWUL-

The TASI fell 1.1% yesterday on turnover of SAR 2.6 bn. The index is down 8.2% YTD.

In the green: ACIG (+8.1%), Batic (+2.3%) and Azm (+1.7%).

In the red: Sasco (-5.6%), Almajed Oud (-5.3%) and Saudi Darb (-5.0%).

THE CLOSING BELL: NOMU-

The NomuC fell 1.2% yesterday on turnover of SAR 16.5 mn. The index is down 23.9% YTD.

In the green: Edarat (+8.1%), Bena (+5.6%) and Alhasoob (+5.3%).

In the red: Alfakhera (-10.5%), iOud (-8.5%) and Group Five (-7.1%).

CORPORATE ACTIONS-

TihamaAdvertising’s shareholders approved a SAR 170.8 mn capital reduction to SAR 229.2 mn in a bid to offset accumulated losses, the firm said in a Tadawul disclosure yesterday. The 42.7% reduction will be implemented by cancelling 17.1 mn shares, bringing the number of shares to 22.9 mn, down from 40 mn.

Budget Rent A Car, also known as United International Transportation, received the Capital Market Authority’s approval for a SAR 263.8 mn capital boost to over SAR 1 bn, via issuing one bonus share for every three existing ones, the authority said in a statement yesterday. The company will fund the increase via its retained earnings, increasing the company’s shares to 104.5 mn.