Stocks head towards their best three-day rally of 2024 on expectations the Fed will be able to cut interest rates this year. Several days ago, equities suffered their worst month since September 2022 according to CNBC.
The volatility is primarily the result of the lack of liquidity and utter domination of algorithmic and technology-based trading amplified by the use of only one trading strategy—passive indexing which comprises about 55% of total S & P 500 capitalization according to FINRA.
Several times the topic of zero-day options has been discussed. Equity derivatives with less than 24 hours to expiration, known as ODTE, have become one of the most popular trades as ODTE now make up 45% of total options volume of the S & P 500, double the level from before the products became widely available in the second quarter of 2022 according to Bloomberg.
The scale of the boom has stirred controversy. There are concerns the activity in ultra short, dated options may be affecting stock volatility, while research has suggested that retail investors using them mostly lose money as the exchanges make money hand over fist.
ETFs are now largely involved in ODTE in an attempt to increase yields.
A Bloomberg poll suggests that 56% of the respondents expect ODTE to end “disastrously,” as “gambling” was the most common phrase used as a description of such products, vehicles that may result in a massive wealth transfer from retail and unsophisticated investors to the exchanges and market makers.
In other words, the expected results with perhaps the caveat that some describe ODTE as “atom bombs” because of the potential damage they could occur given that no one knows the actual leverage that is being employed.
Perhaps one of the only declarative statements to make is that ODTE is now dominating options trading, and no one really knows the ultimate outcome. As noted the other day, Bloomberg wrote the S & P 500 has been remarkably calm in 2024, moving 1% or more in either direction during just 18 of the 85 trading sessions in 2024, while going 300 sessions without closing down at least 2%, the longest stretch since 2018.
Last night the foreign markets were up. London was up 1.04%, Paris up 0.37% and Frankfurt up 0.74%. China was up 0.22%, Japan up 1.57% and Hang Seng down 0.53%.
Futures are flat as optimism is rising that the Fed can reduce interest rates later in the year. The 10-year is up 6/32 to yield 4.46%.
ARE ZERO DATED OPTIONS INFLUENCING MARKET DIRECTION?
Kent Engelke
Chief Economic Strategist Managing Director
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.
