0DTE Options: Investing or Gambling?

A quick online search of the term 0DTE will yield thousands of results on social media platforms such as Twitter (now X), YouTube, Instagram, and Reddit filled with tutorials on how to start investing in 0DTE options. Following NFTs, cryptocurrencies, and meme stocks, 0DTE options are the new craze among young retail investors and show no signs of slowing down.

Indeed, the rise of social media and online trading platforms has made it easier than ever for retail investors to start trading. Whilst this access allows for greater opportunities to build wealth for retail investors, making the stock market a somewhat fairer playing field for all, it may put them at risk if they lack a complete understanding of the risks associated with their trading activities. Since the pandemic, we have witnessed a gamification of the stock markets as demonstrated by the meme stock mania and, notably, the GameStop Saga, which seems favorable to retail investors. However, complex financial instruments and their associated risks may not always be fully understood by retail investors, thus blurring the line between informed investing and pure speculation.

What Are 0DTE Options?

The Securities & Exchange Commission defines Options as “contracts giving the purchaser the right to buy or sell a security, such as stocks, at a fixed price within a specific period of time.” Zero-days to expiration options, called 0DTE for short, are options contracts which have an expiration date at the end of the current trading day.

As these options have a short time horizon, they are extremely sensitive to market fluctuations and time decay, making them particularly vulnerable to a severe volatility shock. However, because of the highly dynamic environment of short-term options, they present high risks but with high rewards. When the markets are highly volatile, the price of options increases as there’s an opportunity for large price swings and thus high profit margins. Conversely, during low volatility in the markets, option prices are low because there are fewer opportunities for significant profit margins.

Due to their purely speculative nature, zero-days to expiration options have recently been compared to gambling, as the new wave of 0DTE options are largely considered retail gambling products. Indeed, the lack of time afforded by 0DTE options prevents investors from doing any significant research on market movements of the underlying financial instrument, but rather only allows for speculations.

What Are the Risks of 0DTE Options?

The trading volume of 0DTE options has increased significantly in the past year alone, with a 60 percent rise in 0DTE option contracts positions opening between January 2022 and January 2023. Specifically, the opening of such 0DTE option contracts positions by retail investors rose by 75 percent within the same time frame. By September 2023, the average daily options volume surpassed 45 million contracts, with one-third of all one-day options trades tied to the S&P 500 index coming from individual investors.

The most obvious risk related to 0DTE options is their high sensitivity to market volatility and changes in the price of the underlying asset. Investors can win infinitely with options, but they can also lose infinitely, making them a risky investment strategy that is exacerbated by the short time horizon.

Further, as global liquidity is decreasing in 2023, investors wishing to hedge their position through short-term options will need to pay a higher spread which will have more net impact on the market, leading to increased volatility and compounding risks for investors. Indeed, Bloomberg reported that Goldman Sachs blamed 0DTE options for fueling the August 2023 S&P 500 selloff.

In addition, such an increase in zero-days to expiration options means there is a rise in leverage, and such excessive leverage in markets may lead to a potential flash crash. In fact, we witnessed the same low-cost leveraged speculation from retail investors during the meme mania.

What is the Impact of 0DTE Options on Investors’ Behavior?

Retail investors may be drawn to 0DTE options because they provide an opportunity to make a lot of profit in a short amount of time and limit the time that your money is tied up in investments. For retail investors who may need money quickly, this short-term investing could be a solution. In addition, 0DTE options usually have lower premiums, making them cheaper financial instruments to invest in. These investments also tend to be commission-free, which could lead to increased gambling behavior.

Further, when it comes to options contracts, bid-ask spreads tend to be much wider than for stocks, which leads Wall Street firms to profit significantly on such trades. Indeed, “[b]rokerages made more than $2 billion from selling options orders last year, more than double what they made from stock orders,” making them more likely to push options trading in order to increase their profit.

Another factor impacting retail investors’ behavior is certain online brokers’ game-like features which are increasing investors’ risks by pushing excessive trading. Whilst traditional securities regulation applies to 0DTE options, the SEC is set to propose new rules to prevent the gamification of stock markets in an effort to protect retail investors from such issues.

Conclusion

Whilst the SEC’s role is to protect investors among other responsibilities, one wonders if additional regulation would not hurt retail investors further. Indeed, whilst the SEC considers certain apps like Robinhood as having game-like features, the online broker considers itself to simply make investing more accessible to the general public. It is undeniable that 0DTE options present risks that retail investors should be educated on. However, by introducing additional regulation, the SEC may be making the stock markets less accessible to retail investors, thus contributing to the wealth gap between the one percent of the one percent of Wall Street and retail investors. The SEC must exert a careful balancing act between protecting investors through regulation and allowing retail investors to generate wealth through the stock markets with their strategy of choice.

Nastassia Merlino is a Corporation LLM candidate at NYU and serves as a Graduate Editor for the NYU Journal of Law & Business and as Graduate Research Fellow at the NYU Pollack Center for Law & Business. She graduated from the University of Geneva in Switzerland with an LL.B. in General Law, a Certificate in Transnational Law (summa cum laude), and a Master’s in Business Law (magna cum laude). She then graduated from NYU Steinhardt and the Stern School of Business with a Master’s in Music Business.