Europe poised for arrival of ‘zero-day’ options

A contentious form of derivatives trading that has swept across US markets is spreading to Europe, with the launch of so-called “zero-day” options tracking an index of the continent’s largest companies.

Eurex, the derivatives exchange run by Deutsche Börse, will offer daily options that track the widely-followed Euro Stoxx 50 equity index from Monday.

Demand for similar contracts that track the S&P 500 has rocketed since the coronavirus pandemic and they now account for more than 40 per cent of the 2.8mn a day of options that follow the US equity benchmark.

So-called zero-day options refer to contracts that expire on the same day they are purchased and allow traders to take targeted positions in stock markets around events such as economic data, corporate earnings or monetary policy meetings.

Their rapid emergence has prompted concern that they trigger daily bursts of activity which could be causing sharp sell-offs in equities late in the trading day.

Eurex said the launch of its contracts, which expire at the end of every working day in Germany, was in response to customer demand. The clamour for zero-day contracts has also boosted the corporate profits of rival Cboe Global Markets, the largest US options exchanges operator.

“The US market for daily options is already established and we saw the strong volume growth there,” said Zubin Ramdarshan, head of equity and index product design at Eurex.

Monday’s launch marks the first daily options products tracking a Europe-wide stock index. The nearest equivalent, Eurex’s weekly options, only expire on Fridays.

The Euro Stoxx 50 options are Eurex’s most popular traded products and Ramdarshan said the exchange was also considering similar contracts for other indices, starting with Germany’s benchmark Dax.

Lotte de Vos, head of European market structure at trading firm Optiver, said she was hopeful the new options “could provide a much-needed boost” to the European options market, which has struggled for growth in recent years.

“An important observation we’ve made from similar products is that they don’t just shift volume from monthly and weekly expiries, but are additive to overall volumes,” she added.

The rapid growth in the US has stoked worries among some analysts and regulators, who fear the way dealers hedge the contracts they sell could exacerbate intraday stock market swings and increase market volatility. 

In the US, contracts with less than a day to expiry now account for 43 per cent of overall S&P 500 options trading volume, compared with just 6 per cent in 2017, according to data from Cboe.

Cboe argued in a paper earlier this month that the concerns were “valid . . . in theory” but in practice the “risk is minimal because investors do not all tend to trade in the same direction.”

But some doubt Eurex’s daily options will have the same impact in Europe because options trading is less popular, particularly among retail investors.

“We’re not expecting the same degree of exponential growth that we’ve seen from S&P [zero-day options],” said Kieran Diamond, volatility strategist at UBS. 

“Weekly-expiry options on the Euro Stoxx are nowhere near as active as the standard monthly options. It’s hard to imagine [zero-day] driving a similar degree of expansion in Europe when people aren’t yet trading the weekly options actively,” he added.

Ramdarshan said rising global interest rates have fuelled the boom in short-term options as markets were driven by uncertainty over how long global central banks will keep interest rates elevated as they try to stamp out inflation.

“Suddenly macroeconomic data releases of unemployment, CPI, factory output, anything that gives an indication of where central banks might either pause rate increases or increase rates . . . is super relevant to trading strategies and hedging portfolios,” he said.