JPMorgan Analysts Believe These Options Could Turn A 5% Market Fall Into A Deadly Disaster: What Are They?

Analysts at JPMorgan have reportedly indicated that increased trading in zero days to expiry options, better known as 0DTE options, have the potential to significantly exacerbate intraday market declines.

The 0DTE options expire on the same day they trade. For a trader to profit, the move in the underlying asset should occur fast. These instruments are relatively attractive for option writers or sellers who take a stand and try to collect the fast-decaying premium.

Also Read: How To Trade Options For Beginners

Scenarios: In a Monday note, JPM analysts said they have estimated that in an extremely critical scenario, 0DTE options could turn an intraday 5% decline in the S&P 500 index into a 25% fall — a magnitude of decline unseen since the Black Monday crash of 1987, when the index plunged 20.5%, reported Reuters.

The analysts expect such a scenario if the S&P 500 declined 5% in five minutes, triggering $30.5 billion in 0DTE option-related trading that would in turn add another 20 percentage points to the index’s decline.

If the S&P 500 loses between 1% and 5% in five minutes, it could trigger the unwinding of positions in the range of $6.6 billion to $14.2 billion, translating to an additional 4 to 8.1 percentage points of fall, the analysts reportedly said.

The analysts also noted that retail traders were not the main driver of volume growth in 0DTE options. Individual investors accounted for about 20% of the SPDR S&P 500 ETF Trust (NYSE:SPY) options volume and only close to 5% of the S&P 500 same-day options.

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