Trading in new near-dated U.S. options contracts can supercharge volatility in U.S. stocks, potentially leading to tremendous intraday declines, analysts at JPMorgan said.
Such a scenario could occur if the S&P 500 fell 5% in five minutes, triggering $30.5 billion in 0DTE option-related trading that would tack another 20 percentage points onto the index's decline, the bank’s analysts said.
If the S&P 500 fell between 1% and 5% in five minutes, it could lead to an unwinding of positions in the range of $6.6 billion to $14.2 billion, translating to an additional 4 to 8.1 percentage points of decline, JP Morgan's analysts said. "The estimated market impacts from unwinding of 0D option exceed the original market shocks in all scenarios, highlighting the reflexive nature of the 0D options and their potential risk posed to market stability," JPM analysts Peng Cheng and Emma Wu wrote in a note.
Furthermore, JPM noted that retail traders were not the main driver of volume growth in 0DTE options, with individual investors accounting for about 20% of the SPDR S&P 500 ETF TrustReporting by Ankika Biswas in Bengaluru, additional reporting by Medha Singh; Editing by Ira Iosebashvili and Matthew Lewis
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