U.S. markets have seen consistent growth in options trading over the past couple of decades. Contracts traded have increased in part because of new options being listed – with more choices for investors.
We recently focused on why looking simply at contracts traded is misleading – as the most active options have a delta below 50%.
Today we look at the impact of new expiry dates on trading volumes. Data shows that options typically trade more the closer they get to expiry, but we find the proportion of trading that happens on expiry date has remained pretty constant. This means the increase in expiry date trading (sometimes called “0DTE”) is mostly because there are more days which have options that expire, as our charts show.
Most option trading is on liquid assets
Option ADV is increasing, but ADV on its own isn’t all that important to this story.
Firstly, we know that most options are traded “out of the money,” so some options volume matters a lot less than others (in terms of investor exposure).
The notional exposure also varies depending on the underlying stock (index) price. Index prices (at around 14,000 for NDX and 4,000 for SPX) are much larger than most stock and ETF prices. Just one NDX option creates around $1.4 million in notional exposure, while you would need to buy over 1,500 options in SOFI to create the same notional exposure. That’s why the columns in the chart below are each so different:
- Index products (liquid exposures to Nasdaq-100 and S&P 500 index) make up over 50% of actual exposure traded – even though they add to less than 10% of ADV.
- Stock options make up over 50% of ADV – even though they add to less than 20% of notional trading.
Despite that, we see that the majority of expiry date volume (ADV) is in ETFs, adding to around 55% of all volumes on expiry dates. ETFs are both liquid and low priced – meaning they add to more ADV. But also, QQQ and SPY are the only ETFs with an expiry on each day of the week, meaning that these very liquid ETFs contribute more Expiry Date volumes relative to single stocks (and other ETFs) that expire only once a week.
Chart 1: Looking at options liquidity (index and stock options)
Historically, expiry date has always been more active
We look below at some of the larger single stock options. These have, for years, only expired once a week (on a Friday). That way, we can look at trading on Fridays to see how much trading happens in the expiring (0DTE) contract, compared to options in the same underlying but with longer terms to maturity.
What the data shows is that although expiry date trading is large – at around 40% of all volume – it has not increased over multiple years.
Chart 2: Proportion of trading occurring in weekly options on expiry day compared to other terms to expiry
Expiry date sees more closing trades than other days
Part of the reason expiry date trading increases is that many investors prefer to close out their options positions rather than deal with the administrative costs and hedging risks of exercising their “in the money” positions.
The data in Chart 3 shows that the closing of positions increases by 50% in the final week of the option, rising to around one-third of all trades on expiry day.
Chart 3: As options near expiry, position closing trades become more likely
Expiry date volumes have increased because there are more expiry dates
So why are people talking about expiry day volumes?
One thing that has changed, as markets have added options more suited to customers' risks and exposures, is there are more days of the week with options that expire.
- Weeklies: there are now around 650 symbols that expire every Friday, creating expiry dates that fall on four or five days each month compared to a little over 10 years ago, when there were only one or sometimes two expiration dates in the same timeframe.
- So-called “Dailies”: for the most liquid underlying tickers (only Nasdaq-100 and S&P 500, Index and ETF, exposure), weekly options have been introduced that expire on other days of the week too. That means there are four very liquid underlying instruments with options that expire every day of each week.
Importantly, Nasdaq-100 and S&P 500 trading also represent most of the trading in equity futures too.
Table 1: Some weekly options expire on all days of the week
From what we learned above:
- Expiry day is the most active trading day for almost all options.
- Nasdaq-100 and S&P 500 are the most active options.
- Nasdaq-100 and S&P 500 have some weekly options expiring every day.
Consequently, the amount of “expiry day” (0DTE) trading is bound to also increase as a percentage of all trading. We can see that in Chart 4, which shows the ADV on each of the days where expiry happens for each contract:
- Expiry day ADV for quarterly options is zero in the quarters without an expiry.
- Similarly, expiry day ADV for Tuesday and Thursday options was zero until they were first listed in 2022.
- The black line shows the proportion of trading days with an expiry. It starts at around 20% (Fridays are around one-fifth of all trading dates), increases to 40% with the introduction of Wednesday weekly options, then to 60% when Monday options were added (representing around 3 of the 5 trading days in a week).
- In 2022, the addition of Tuesday and Thursday expiries meant there is some option expiring on 100% of trading dates.
The chart also shows that the ADV on expiry day for monthly options has also increased over time. That is because of the addition of more monthly symbols.
Chart 4: Expiry day ADV, broken out by the option types and days with expiry
Increases in expiry date trading is a product of more expiry dates on the most liquid options
The data shows that the proportion of trading that happens on expiry date has remained pretty constant. However, the introduction of more expiry days — for the most active options — has increased the amount of expiry date trading that is occurring.
It’s important to note that 0DTE is not a “product,” and trading of options on the date they expire has existed as long as the options asset class. In short, 0DTE has not increased only because investors like trading options with shorter time risk (less theta or time to expiry). It has instead increased because the most liquid options have more expiry days.