Wall Street’s Latest Trick: Making a Killing with Super-Cheap, Super-Volatile Options, Leaving Small-Time Investors in the Dust

The current state of the stock market is experiencing increased volatility, creating opportunities for long-term investors to capitalize on potential gains. Despite the S&P 500 closing unchanged on Tuesday, the use of zero-day-to-expiry options has caused frantic buying and selling amongst traders.

Zero-day-to-expiry options, which expire on the same day they are issued, have become increasingly popular and beneficial for speculators. By eliminating the time value of an option, these options offer greater leverage and the potential for significant returns.

Morgan Stanley (MS) has found a significant advantage in the use of 0DTE options due to their unique mechanics. These options expire on the same day they are issued, providing a short-term structure that is highly advantageous for speculators. Traditional options rely on time value to determine cost, but 0DTE options eliminate this factor, resulting in greater leverage. With the potential to generate returns of 1x, 2x, or even 3x daily, it’s no wonder that many small speculators have been attracted to these options in pursuit of significant profits.

However, the growing popularity of 0DTE options has raised concerns about increased volatility in the market. While small investors are eager to participate in the trend, it is important to note that options trading is a zero-sum game, meaning that for every winner there is a loser.

Furthermore, large investment banks, such as Morgan Stanley, are often the sellers of 0DTE options, allowing them to hedge their risks and create riskless trades. Despite the volatility, this makes hedging S&P 500 contracts relatively riskless for these bankers.

In fact, the rise of 0DTE options has been a boon for Morgan Stanley, which is the leading market maker at the Chicago Board Options Exchange. The company reported soaring trading profits in the fourth quarter of 2022, demonstrating the potential for gains in this market.

Overall, while the use of 0DTE options has created a “David versus Goliath” theme in the market, small investors should be wary of the risks and not assume that they have an advantage over larger investors. As a stock market analyst, it is important to recognize the potential for gains in this market, but also to be aware of the risks and uncertainties that come with it.

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