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Wall Street Taps Into Rising 0DTE Options Craze Amid Regulatory Glance

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Ticker Tea
February 22, 2024

📝 SUMMARY: The surge in popularity of zero-day-to-expire (0DTE) equity options has captured the attention of Wall Street brokers, leading to an influx of new strategies aimed at tapping into the burgeoning retail and institutional demand. Firms such as Options AI have seen trading volumes double since the introduction of S&P 500 (.INX) tied options, while Moomoo Technologies Inc. is enticing traders by waiving exchange fees for these index contracts. Webull Financial LLC now permits clients to sell derivatives without owning the underlying asset, and Robinhood Markets Inc. is planning to expand its offerings into broad index options.

The appeal of 0DTE options lies in their low entry cost and the potential for high returns, making them a favorite among day traders like Daniel Crocker, who has experienced both significant gains and losses. The Federal Reserve has taken notice of this trend, adding questions about dealers' risk management of 0DTE options to its surveys, reflecting concerns about the impact on market volatility and speculation.

S&P 500 contracts have seen a 48% surge in volumes, outpacing the growth of the broader options market, with retail investors accounting for as much as 40% of these transactions according to Cboe Global Markets data. The revenue potential for brokers is substantial, with the possibility of generating almost $70 million from S&P 500 0DTE volume alone, despite most online brokers charging contract fees.

This movement towards 0DTE options trading underscores a shift in the financial industry, where brokers are adapting to meet the evolving preferences of traders. However, it also raises questions about the sustainability of this trend and the ability of Wall Street's risk managers to keep pace with the increasing complexity and risks associated with these short-term speculative instruments.

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