(BFM Bourse) – The European derivatives specialist Eurex launched options expiring the same day on the Euro Stoxx 50 index on Monday. In the United States, these financial products are singled out by certain analysts who believe that they increase volatility and disrupt the market.
New phenomena on the stock market often tend to hatch in the United States and then spread to Europe with a certain lag time.
This is still the case with the “zero day” options, which arrived this week on the Old Continent. As a reminder, an option is a financial instrument derived from a given asset. It allows an investor to hedge a position or, on the contrary, to speculate with a high leverage effect. The investor thus buys, for a premium, the right (and not the obligation) to acquire or sell an underlying asset at a given strike price. In the case of a call option, he will make a profit if the price of this asset exceeds the sum of the strike price agreed in the contract and the cost of the premium.
A “zero day” option has the particularity of having an expiry date which falls on the same day, at the close of the market, with therefore a duration of less than 24 hours. “Options technically expire the day after their last trading day, but since there are no more days left to trade before expiration, the expression is appropriate”, explains in L’Agefi suisse Valérie Noël, director of Trading at Syz Group.
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A resounding success in the United States
These options appeared in the United States, with the major American indices as underlyings, especially the S&P 500. Called “0DTE” (for “zero day to expire”), these securities have recently experienced great success across the Atlantic, to the point of representing, according to data from the Nomura bank cited by Bloomberg, up to 55% of the volumes of options linked to the S&P 500, during the month of August.
They have therefore just reached Europe. The derivatives market operator Eurex, owned by Deutsche Börse, launched these options on Monday with an intraday expiry on the flagship pan-European index, namely the Euro Stoxx 50.
“The demand for daily expiry options has increased in recent years, particularly among institutional investors. They are used to target exposures or hedge risk around specific events such as economic data releases or bank meetings. plants,” the company said in a statement.
“In the context of increasingly volatile markets, daily options are another innovative solution allowing professionals to effectively manage their exposure in a regulated and transparent market environment”, for his part developed Randolf Roth, member of the management board of ‘eurex.
This last statement seems a little surprising insofar as “zero day options” are regularly singled out for having increased the volatility of the American markets.
“Volmageddon”
“The keen interest in these fast-expiring options is reaching unprecedented heights as the market has recently been rocked by waves of intense intra-day variations”, underlines Valérie Noël in her column in L’Agefi Suisse. “This convergence seems anything but a coincidence,” she continues.
The Chicago board options exchange (Cboe), an American market operator specializing in derivatives, has also recently launched a new volatility indicator VIX (“V1XD”) to better measure this increase in volatility, based on the construction of this new indicator on 0DTE options.
The rapid emergence of these options has sparked “concerns that they are triggering daily bursts of activity that could cause stocks to sell off at the end of the trading day”, notes from his side the FinancialTimes. To the point of arousing fears among regulators and analysts, adds the British daily.
JPMorgan bank strategists had mentioned a risk of “Volmageddon 2.0” (a portmanteau word based on volatility and “Armageddon”, which refers to a volatility shock observed in February 2018) due to the rise of these options, thus highlighting a source of turbulence for the market. Quoted by Bloomberg, Scott Rubner, of Goldman Sachs, had for his part estimated that these securities had fueled a relatively sharp decline in the S&P 500 (-0.4% in twenty minutes), during a session in mid-August.
A catalyst for European options
Beyond the questions surrounding volatility, Bloomberg points out that the demand for these options in Europe will be fiercely followed, in a “moribund” market. According to UBS data quoted by the agency, the notional amount (the underlying amount committed by one or more options) on options on the Euro Stoxx 50 represented, in July, a total of 45 billion dollars per day. against nearly $1.3 trillion for the S&P 500.
Lotte de Vos, from the investment company Optiver, thus entrusts the FinancialTimes hope that these European versions of the “0DTEs” “could give a much-needed boost” to the European options market, increasing volumes.
Bloomberg believes, however, these products face “an uphill battle to have an impact” in Europe, particularly in view of the underperformance of indices, the decline in the number of listed shares and stagnant trading volumes.
Moreover, if individual traders have flocked to “zero day options” in the United States, at least partly explaining their rise, this will certainly not be the case in Europe where individual investors are much less present (and the much stricter regulations for accessing these products).
“There’s not the same kind of pent-up demand” for these kinds of products, Kieran Diamond, London-based derivatives strategist at UBS Group AG, told Bloomberg. The same market specialist explains to the FinancialTimes, that one-month options on the Euro Stoxx are also much more popular than one-week ones. We can therefore deduce that the appetite for daily titles is likely to be limited.
Julien Marion – ©2023 BFM Bourse