Everyday Of The Week Is An Expiry Day | Impact Of 0 DTE Options

3 авг. 2023 г.

After the latest circular from NSE, MidCPSelect Nifty which tracks a handpicked 25 stocks will have expiry date shifted from Wednesdays to Mondays. And BankNifty which tracks the top most banks in India will have expiries on Wednesdays instead of Thursdays.

This change in status-quo has created a situation wherein we have a daily expiry. Much similar to the 0 DTE (zero day to expiry) by CBOE in the US.


Many economists have published whitepapers on how this could impact the options trading industry, speculations, index movements. But we still have no clarity on how the future will unfold. You might already know how “options” as a financial instrument is a double edged sword due to the leverage it provides.

Let me try to voice my version of what will happen!

• Stock markets have already caught the attention of the wanna be rich guys. Although options trading is a newer concept, stock market & betting has been here for more than 100 years. People generally buy stocks in the anticipation that they could sell it back at a higher cost and thereby profiting.
  
• Most often these buys are not because they like the underlying company or have done the research of the firm but just to get rich quick.
  
• Options trading is the next level of betting from stock trading. Options instruments CALL & PUTS give the ability of the buyer to handle a higher number of shares of the firm for a fraction of the total cost (for a limited time).
  
• That limited time is the catch here. Every option instrument will expire on a predetermined date called expiry day. Whereas the stocks have no expiry dates. What this means is that if you have purchased CALL OPTIONS you expect the stock to move up real quick before the expiry, if it doesn’t you lose the premium paid. Whereas in stocks you have the privilege to hold the shares as long as you like.
  
• The reason options were introduced was to hedge the owner of the shares against its short term fluctuations. For eg: If I own 100 shares of XYZ and I wish to hold this for the next 10 years, but a recent report says XYZ company has lost one of its licenses & the shares could tank. What I could do is buy PUT options of the firm so that my downside is protected for the short term.
  
• When I decide to buy the PUT options someone has to take the counter position. It could be the market maker or a speculator.
  
• The market maker, if he decides to sell that PUT option to me, has a net long exposure, which means he makes money only if the stocks stay as they are or move up. Technically no market maker likes to have a directional exposure, so he will immediately take another few trades to become delta neutral.
  
• Or it could be a speculator who is just there to make money. This guy may not have a stock holding against the position he has taken. Most likely this person has the belief that stock XYZ is moving up.
  
• Stocks still have a monthly expiry, which gives ample time for the buyer/seller of the option instrument to change or modify their long/short exposure according to the price action/news flow. Whereas Indices are now set with weekly & monthly expiries.
  
• Earlier both Nifty50 and BankNifty expired on the same day ~ Thursday. So the speculation was either mostly on that one day or via overnight positions built up towards the expiry.
  
• With the new changes 6 separate indices are set to expire on separate days of the week, which means a speculator has the opportunity to gamble into a long or short exposure every single day of the week.
  
• We now know the speculator is only interested in making money provided his views/research is accurate. Honestly I still dont believe any retail trader is a match for the institutions with their supercomputers, mathematical modeling or the kind of talent they attract. So if someone has to lose money in this process, it has to be the lowest hanging fruit.
  
• Since there are daily expiries, the retail trader is enticed into an opportunity to make easy money. The good thing is that overnight is not there, but this trader has to be knowledgeable enough on what he is getting into.
  
• Both the size & count of betting will increase & its going to be a harvest for the Government, Brokers & Professional Traders. After a while it is going to be like any gambling sport or a lottery business.
  
• Market makers will be glad to offer a wider bid/ask spread and profit, usually the end trader is not aware of this slippage.
  

Since the volume of trades are going to explode, there is a risk of risk-oversight. Let me try to explain.

Case1: Markets prefer to stay range bound — this is the best case for all the participants. Most often the day ends just like the day begins & there are no hefty options adjustments, roll up or roll down.

The premiums in the strikes will be normal (usually low)
Since the swings are normal, option strikes do not create unwanted build up of open interest (volumes will be as usual)
This scenario is safe for all the participants even though there is an equal amount of money to be won or lost.
Case2: If the markets start to pick a direction — it is going to have a spiraling effect which cannot be quantified by any mathematical modeling

• If the markets are moving against a net sell position, the trader will start covering to reduce loss.
  
• This will create a spike in open interest of that strike & nearby strikes.
  
• Once the volumes begin to spike, more speculators will jump in creating premium mispricing.
  
• When the option premium mis-pricing exists, arbitrageurs will enter the game.
  
• Market makers will be glad to write options & counter balance it by going long or short in the underlying. This algo or HFT will further escalate the directional move.
  
• This 2nd category will create a self perpetuating trap if left unchecked. The high frequency traders are usually computerized and do not stop if they see the directional movement picking up speed. These machines feed on this distress & usually suck the soul out of the retail traders. Well it’s not a fault, but the machines are engineered that way.
  

The indices would fall or rise for no real reason and could wipe out a select portion of traders due to their unlimited loss options exposure. And the next day this index could revert to normal as this fall/rise was just due to speculation & nothing to do with fundamentals.

A black monday or a flash crash could be normal and more frequent. And there are 2 instances where this could even translate into deeper wounds.

The same component stocks, almost in the same weightage are participating in adjacent expiries.

• FinNifty on Tuesdays & BankNifty on Wednesdays
  
• Nifty50 on Thursdays & Sensex on Fridays.
  

So if we had a big movement on a Tuesday, it could even set the stage for further acceleration on Wednesday as the same underlying component stocks were impacted.

Having said all these, I am sure there would be many think tanks who would have thought through all these & implemented some safety nets to protect the vulnerable subset of people. If the case1 scenario plays out it should be a hunting ground even for a commoner like you & me to make some money!