Retail Traders Love 0DTE Options... But Should They?

33 Pages Posted: 13 Apr 2023 Last revised: 26 Dec 2023

See all articles by Heiner Beckmeyer

Heiner Beckmeyer

University of Münster

Nicole Branger

University of Münster - Finance Center Muenster

Leander Gayda

University of Münster - Finance Center Muenster

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

Suggested Citation

Beckmeyer, Heiner and Branger, Nicole and Gayda, Leander, Retail Traders Love 0DTE Options... But Should They? (March 30, 2023). Available at SSRN: https://ssrn.com/abstract=4404704 or http://dx.doi.org/10.2139/ssrn.4404704

Heiner Beckmeyer (Contact Author)

University of Münster ( email )

Schlossplatz 2
Muenster, D-48143
Germany

HOME PAGE: http://heinerbeckmeyer.com

Nicole Branger

University of Münster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Leander Gayda

University of Münster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

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