Retail Traders Love 0DTE Options... But Should They?
50 Pages Posted: 13 Apr 2023 Last revised: 26 Dec 2023
Date Written: March 30, 2023
Abstract
Our study investigates trading in options that expire on the same day-so-called "0DTE" options-through the lens of retail investors. Using the recently activated Automated Price Improvement Mechanism to identify option trades that originate from retail investors, we find a strong preference for 0DTE options. Today, more than 75% of their trades in S&P 500 options involve 0DTE contracts. Despite benefiting from lower e↵ective spreads due to the price improvement mechanism, retail investors experience substantial losses. We explore the factors influencing how retailers are positioned in this market, and identify several drivers for their poor performance, both in the aggregate and at the level of individual trades.
Keywords: retail trading, options, preferences, payment for order flow, 0DTE
JEL Classification: G4, G5, G12, D4
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