Wall Street is set for calm options event as short-term bets boom

A merciful prospect for Wall Street traders befuddled by endless Federal Reserve-spurred volatility and the frenzy for short-term derivatives: February’s options expiry looks set to pass smoothly this time round.

After repeatedly roiling the stock market for the past two years, Friday’s deadline for maturing options is potentially less impactful than usual. With just 79 million contracts scheduled to roll out, it’s the smallest volume for a monthly expiration in at least two years, according to data compiled by Susquehanna International Group.

The muted expiry is masking the boom in fast-twitch options, driven by retail and institutional investors alike as firms including Cboe Global Markets Inc. have expanded their options offering. The explosive use of short-dated contracts, increasingly felt through intraday equity reversals, drew a rebuke this week from JPMorgan Chase & Co.’s top-ranked strategist Marko Kolanovic — warning of a volatility implosion like early 2018.

Yet even as investors flock to stock contracts with zero days to expiry — known as 0DTE in industry parlance — positions are being opened and closed in a flash, leaving no footprint in overall open interest despite their share in the S&P 500’s trading volume reaching 50% this month.

“Investors came into the year under-hedged, under-invested,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “0DTE volume focus on up-crash and lots of call buying.”

Up nearly 1% this week, the S&P 500 is poised to break a two-year pattern where stocks tended to post losses around the time of OpEx. In all previous 25 months, the index rose only five times during the OpEx week, data compiled by Bloomberg show.

As stocks continued to march higher, traders booked profits from their bullish calls, contributing to a decline in contracts outstanding. Across indexes, single stocks and exchange-traded funds, the number of call options expiring Friday fell 12% from a year ago, data from Susquehanna show.

“The calls are more actionable post rally and many have been monetized or rolled out, detracting from open interest,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. “While the popularity of weekly and daily options have taken from the impact of monthly expirations, it’s still a notable event.”

Brent Kochuba, founder of SpotGamma, echoes the sentiment. By his model, there are a lot of options positions that have been supporting the S&P 500 at 4,100. Indeed, the benchmark gauge has managed to stay above the level in all but two sessions this month. As these positions expire Friday, he warns, such buffer is at risk of disappearing.

“This could also open the door to some weakness for next week,” Kochuba said. “If there is weakness, we would highlight the 4,000 level as major support due to very large, longer-dated options positions that sit at that strike.”