00:00 Welcome, it's Michael Murray with Benzinga. I'm joined here today by Jonathan Zayon, Senior
00:06 Derivatives Analyst at Cibo Global Markets. Jonathan, always a pleasure to be joined by
00:10 Cibo. How are you?
00:11 Thank you for having me, Michael. Good morning.
00:12 Outstanding. It's a pleasure to have you here. Very excited to be talking with Cibo Global
00:16 Markets once again and talking about zero DTE, which is our topic for today. What exactly
00:21 is zero DTE and how exactly does it function?
00:24 Yeah, absolutely. So zero DTE stands for zero days to expiry. It basically just refers to
00:30 an options trade that occurs on an option that's expiring that same day, which typically
00:35 is at the end of regular trading hours, which is 4 p.m. Eastern. Most of these options existed
00:41 before this day. Typically, they've been listed weeks, months, potentially even a year ago.
00:47 But zero DTE just stands for trading it on that day. It wasn't necessarily listed that
00:52 day. However, we've been seeing the volume trends that everyone's talking about, how
00:56 most of the volume is centered around this day. We've actually seen about 45 percent
01:02 of total SPX volume happening on the same day of expiry.
01:05 Understood. And who are the largest users of zero DTE and who is this the best fit for
01:10 in terms of investor or trader profile, for example?
01:13 So I think there's a use case for zero DTE for many different types of investors and
01:18 traders. I wouldn't say that there's one or even a group of people who it's the best for.
01:23 For example, some of the largest groups of people we see using these options are institutional
01:28 investors. You have your asset managers, your registered investment advisors. They potentially
01:33 could be selling premium to harvest it in the very short term. They could be using it
01:38 to delta hedge their larger portfolio positions without really wanting to unwind a lot of
01:43 their longer positions. And of course, we're seeing a lot of participation on the retail
01:47 end of things as well. You know, retail traders, I'd say, are as sophisticated as ever when
01:53 it comes to options. We've been seeing a nice breadth of strategies with retail.
01:57 Got it. And what strategies are retail traders using and why? How does zero DTE kind of relate
02:02 and tie in here to what those strategies are?
02:04 For sure. So we see retail traders using our SPX product a lot. We also see them using
02:10 XSP, which is the mini SPX product. It's a notional size of one tenth of the size of
02:16 SPX. It's the same size as SPY, but you still get all those benefits, you know, the cash
02:21 settlement, European settlements, etc. as you would get with SPX. So one of the largest
02:27 strategies we're seeing both in SPX and XSP when it comes to zero DTE trading with retail
02:33 is selling call and put spreads. So a call spread or selling a call spread specifically
02:39 is basically selling an out of the money call and then buying a further out of the money
02:43 call to kind of hedge yourself should the market rocket up one day. You only would participate
02:49 in the losses of the strike distance between the short and long strike that you choose
02:54 minus whatever premium you received initially to enter that position. And then on the flip
02:58 side of that, you have put spreads as well, which function the exact same way. So we actually
03:03 see, you know, similar usage between call spreads and put spreads. We find that a lot
03:08 of the retail zero DTE volume is non-directional on average. So, you know, you'll have someone
03:15 who thinks that the market's going to go up after the Federal Reserve increases interest
03:19 rates. So maybe they would sell a put spread to get some premium. And then as the market
03:24 goes up, hopefully both of their puts would expire worthless. On the flip side, you may
03:28 have someone that thinks the market's going to go down. So they would sell a call spread
03:32 to harvest premium in the beginning. And then as the market hopefully goes down for them,
03:37 their calls would expire worthless as well. Another popular strategy we see that's called
03:42 an iron condor. It's actually a combination of a call spread and a put spread. That's
03:48 something that people typically enter if they think, or let's say they sell it. So you sell
03:53 a call spread and a put spread if you think that the market is going to stay within a
03:57 specific band. So, you know, if you're seeing good premium opportunity on this Federal Reserve
04:02 day, you know, and you want to collect some premium right now, and you think that the
04:07 market reaction is going to be pretty muted, you could sell this iron condor. Typically,
04:13 you know, maybe you get a couple bucks for a five point wide iron condor, 50 basis points
04:18 out of the money or something like that, just as an example. And then as the market hopefully
04:22 doesn't move for you on your trade, you would just get to keep your $2 in premium and that's
04:26 it. On the flip side of that, we see people buying iron condors a lot. So buying iron
04:31 condors are a good way to express that. I think there will be a lot of volatility, but
04:35 I don't really want to pay up for a straddle, which is just buying a call and put at the
04:39 money or a strangle buying a call and put out of the money. So I can actually receive
04:43 a discount to the overall package price by selling these shorter legs at the end of it.
04:48 So, you know, like I said, retail is as sophisticated as ever. The strategies we're seeing from
04:54 them are impressive to say the least, and they're finding many different use cases for
04:58 this product.
04:59 Thanks for the in-depth minning. And how was the liquidity in SPX Zero DTE versus other
05:03 Zero DTE products?
05:04 For sure. So SPX is one of, if not the most liquid options products in the entire world.
05:10 It has a robust set of many different market makers that compete to really offer world-class
05:16 liquidity on a regular basis, both in terms of tight bid-ask spreads and sufficient bid
05:21 and ask sizes up at any given time. SPX Zero DTE specifically, given there's such a focus
05:27 on Zero DTE, and that's about 45% of the volume, you know, we've been hearing from a lot of
05:32 the market makers that they are having a special focus on Zero DTE. You know, whether that's
05:38 putting extra traders on the desk or having your own desk for Zero DTE, whatever it is.
05:44 But as a result of that, we see that world-class liquidity. Typically you'll see, let's say
05:48 your 50 Delta and below options on Zero DTE quoted at 5 or 10 cents wide, which keeping
05:55 in mind SPX is 10 times the size of SPY, which is probably the second most popular Zero DTE
06:02 product. And if SPY are a penny wide, that's sorry, if SPX were 5 cents wide, that's basically
06:09 the equivalent to SPY being half a penny wide, which of course it can't be. So the liquidity
06:15 we're seeing is extremely impressive. And you know, there's dedicated teams at SIBO
06:20 where we're working on really improving that, improving the customer experience as much
06:24 as we can.
06:25 Absolutely. And a final question for you, Jonathan, why do retail traders seem to prefer
06:29 Zero DTE over longer term maturities?
06:31 Yeah, absolutely. So short dated options in general or Zero DTE more specifically offer
06:37 really inexpensive ways relative to longer term options to express views tactically around
06:43 the market. We find that a lot of people use these typically complimenting their longer
06:47 term strategies or longer term portfolio. You know, I mentioned the example before about
06:53 a Federal Reserve announcement day where you believe the market's going to fall. Instead
06:59 of selling out of your long positions, let's say you own a bunch of ETFs, you're long in
07:03 the market for your long term portfolio. Instead of selling out of those and paying the trading
07:07 costs to do so and probably realizing gains and needing to pay taxes as a result of that,
07:12 you could just hedge yourself with a Zero DTE put, which is relatively inexpensive.
07:18 I gave the example a couple of weeks ago for a Fed day that happened a few months ago.
07:23 The market opened at $4,000. The at the money put for Zero DTE cost $26. And the traditional
07:31 Friday expiry, which was two days later than this cost, I think it was $42. So significantly
07:38 more expensive to hedge yourself longer term, especially given that the risk over those
07:43 three days was really concentrated around that Fed announcement. So it's just a very
07:49 efficient way to do that. On the flip side, there's people who are willing to sell these
07:53 very short dated options for premium. They're the ones essentially selling the market insurance
07:59 for that day. People like doing that instead of over the longer term, they like doing it
08:04 on the shorter term as they can do it more often. They find out day of really if they're
08:10 selling that day was successful or not. And over the long term, they should be harvesting
08:14 the volatility risk premium that exists in the marketplace. So while longer term maturities
08:20 do have many use cases and their volume really has been increasing significantly as well,
08:26 there's definitely a lot of interest in Zero DTE from all types of participants, but definitely
08:30 that would include retail participants.
08:32 Outstanding. Now, Jonathan, of course, before we close to, we want to mention that you can
08:36 learn more about Zero DTE by downloading Cibo's free Zero DTE white paper. That's at Cibo.com/ZeroDTEwhitepaper.
08:44 Thank you very much for taking the time. We really appreciate all the insights and making
08:47 this quick and easy to understand. Thank you very much for joining us.
08:50 For sure. Thank you so much for having me. Appreciate it.
08:59 ♪ I'm a creep ♪
