Monday Brings A New 'Fear Gauge' For Stock Market Investors

On Monday, the Cboe will launch an index tracking implied volatility using options contracts less than one day from expiration, providing a new stock-market fear gauge.

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In a notice on the Cboe website, Cboe announced that its new product is to be disseminated starting Monday. Trade Algo reached out to Cboe for comment, but it did not respond.

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There has been a rapid increase in trading in options contracts that are one day or less away from expiration since 2022. This type of product is commonly referred to as a 0DTE, short for zero days until expiration.

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Market experts believe the "VIX" no longer provides a complete picture of how volatile traders expect markets to be, which is why the new index has been released.

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Dow Jones Market Data reports that the VIX closed at 16.83 on Tuesday, its lowest close since Jan. 3, 2022. Those levels have remained unchanged since then. The Cboe S&P 500 9-Day Volatility Index also includes volume in options with nine days or less until expiration.

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In most cases, 0DTE traders use option contracts based on the S&P 500, or the SPDR S&P 500 exchange-traded fund (SPY). Other popular equity indexes, such as the Nasdaq-100-tracking Invesco QQQ Trust Series ETF (QQQ), allow investors to trade weekly options contracts expiring every day of the week.

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It comes at a time when 0DTE trading volume is increasing.

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Based on data from Citigroup's head of U.S. equity trading, Stuart Kaiser, 0DTE trading accounts for 43.4% of total options volume. Over the past month, more than half of equity call purchases have been made through call options that expire within 24 hours. A call option entails buying an underlying asset at a set price by a specified date, but the holder does not have to do so. You can use them to predict the rise or fall of an index or security.

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In recent years, institutional traders have embraced strategies using options contracts that are close to expiration. 0DTE trading was once considered a high-risk product favored by retail traders. It is now institutional trading that accounts for the most activity in these options, according to a team at JPMorgan Chase & Co. (JPM).

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The University of Munster found that over the last five years, retail traders have lost on average $358,000 a day through 0DTEs, a practice that has been compared to buying lottery tickets.

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Heiner Beckmeyer, Nicole Branger, and Leander Gayda, as part of a team of researchers, said their study serves as a cautionary tale against investors without adequate financial education accessing highly complex trading vehicles.

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There is a good chance that U.S. stocks will finish lower on Friday. That would be the second loss in three weeks for the main U.S. equity benchmarks. While the S&P 500 has remained in a narrow range between 3,850 and 4,150 since mid-February, there has been little movement since then.

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In early afternoon trade on Friday, the Dow Jones Industrial Average edged down slightly while the Nasdaq Composite fell by less than 0.1%.

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