Last year, Nomura’s Charlie McElligott suggested that every session had become its own self-contained narrative — that each trading day was “its own ecosystem.”

Part and parcel of that reality was pervasive day-trading in very short-dated options. In 2022, it became apparent that such behavior was no longer the sole purview of retail investors. Vol traders at some of the “largest funds on the Street” were likewise rolling the dice in 0- and 1-days-til-expiration (DTE) options, McElligott said.

Fast forward a few months and the trend is intact. “The nature of trading in US equities has shifted notably in recent years,” Cameron Crise remarked last week, commenting on the same dynamics, and noting that “the explosion of 0DTE contracts [is] creating substantial flow and pockets of (illiquidity) that are impossible to model beforehand.”

As the figure above from Nomura shows, the popularity of short-dated options continues to rise, which, as McElligott put it, “feeds the market’s ‘chase’ and ‘gamma squeeze’ momentum.”

This is conducive to the deliberate creation of self-fulfilling prophecies in individual names via the infamous “weaponized gamma” phenomenon, and can even be used to amplify directional moves in the overall market. Convexity is a helluva drug.

But there’s probably more to it than that. In another recent note, McElligott dove into the nuance. “Much of the volume / flow is electronic market makers slicing-and-dicing these as vehicles against their intraday risk positioning needs, meaning massive noise and ‘netting out’ effect,” he said, before suggesting there may be a regulatory- / risk-management arb opportunity as well.

“With a 0DTE, you would theoretically not need to post margin / collateral with your PB, as by EOD there is no trade to see,” Charlie wrote, adding that 0DTEs could also be viewed as a “surrogate” for futures trading. “You don’t have to put stop limits out there, so in this case, they simply help avoid stop-outs without being a pure-play read on anything sinister about risk appetite run amok,” he remarked.

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‘The Big Boys Are Now Full-Tilt Day Traders’