What Are Zero-Day Stock Options? Why Do They Matter?

The boom in the stock options known as zero-day-to-expiry, or 0DTE, started in 2022 and shows no sign of slowing. They’re a rapid-fire, turbocharged version of options for institutional traders looking to hedge short-term risk and pursue strategies based on darting in and out of positions. For retail investors, they’re a way to make big wagers on the cheap that can pay off quickly — or lose money just as fast. Their appeal has been enhanced by a stock market swinging with every new bit of economic data and monetary-policy speculation, leading the securities industry to conjure up new ways to tap the surging demand for them. But with the investing tool now on the radar of the US Federal Reserve, it’s an open question whether Wall Street’s risk managers are able to keep up with the 0DTE frenzy.

Options are derivative contracts generally used to make bets on the direction of an index, stock or exchange-traded fund. Buying an option gives a trader the ability to buy (via a “call” option) or sell (via a “put”) a security at a certain price within a certain time frame. The money required to buy an option is generally less than the underlying asset’s cost. 0DTE options take that time frame to an extreme; since they expire within 24 hours, the trader has to decide quickly whether to exercise the option or walk away and lose the initial outlay.