Retail Traders Love 0DTE Options... But Should They?
33 Pages Posted: 13 Apr 2023 Last revised: 26 Dec 2023
Date Written: March 30, 2023
Abstract
Our study investigates the implications of trading in options that expire on the same day - so-called 0DTE options - through the lens of retail investors. Almost the entire growth of trading in S&P 500 index options can be traced back to demand for 0DTE options. We use recent exchange-related developments to identify option trades that originate from retail investors, and find that more than 75% of their trades in S&P 500 options today are in 0DTE contracts. While retail investors benefit from significant price improvements in the form of lower effective spreads, they experience large losses on average: between February 2021 and September 2023, retail investors lost $241,000 on an average day; since the introduction of a daily expiration calendar in May of 2022, this number has grown to average losses of $350,000 per day. We find that single-leg trades, trades that require an upfront payment to be set up, and trades that use high-implied volatility options are responsible for these losses. In contrast, multi-leg trades and trades that capture the compensation for volatility and jump risks are significantly more profitable.
Keywords: Retail Trading, Options, WallStreetBets, Payment for Order Flow, 0DTE
JEL Classification: G4, G5, G12, D4
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