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The U.S. Federal Reserve held interest rates steady at its most recent meeting on March 20 while signaling that rate cuts are likely sometime later this year. The forward guidance was perhaps slightly more dovish than market expectations, as the benchmark 10-year Treasury yield declined three basis points to 4.27%, and equity indices rose about 1% on the day.
It wasn’t a tremendously volatile day, but traders with a correct opinion had a relatively new vehicle through which to express that opinion: zero-day options (ODTEs).
The shortest-term listed options expire at the end of the same day they’re traded. A trader with a Fed view can buy and sell weekly and monthly options, but there’s a lot else that will happen in the economy and markets during that time frame – ODTEs narrow it down and are the purest way to express an opinion on an event happening on a given day, without having to hold a position overnight.
Zero-day options have surged in popularity in recent years as traders have recognized their profit potential, liquidity and flexibility, and the options comprise as much as 50% of the volume in some contracts.
In November 2023, Nasdaq added five Wednesday 0DTEs based on exchange-traded products: iShares 20+ year Treasury Bond (TLT), United States Oil Fund (USO), United States Natural Gas Fund (UNG), SPDR Gold Shares (GLD) and iShares Silver Trust (SLV).
Greg Ferrari, Vice President, and Head of North American Exchange Trading at Nasdaq, recently told Risk.net that TLT and GLD have been the most popular, generating outsized activity when markets are volatile.
The rationale behind launching options expiring on Wednesdays was to facilitate more precise hedging and risk management around events – in this case, Fed rate decisions, published statements, and follow-up press conferences with Fed Chair Jerome Powell.
“That’s why the Wednesday contract was launched first – because there are eight Fed announcements in a given year, and they’re all on Wednesday,” says Ferrari.
The five newer 0DTEs have underlying assets that have some correlation, as Fed rate decisions hold implications for economic growth, which, in turn, affect precious metals and commodities. “These are very related assets,” Ferrari told Risk.net. “What happens in the commodities market tends to have an impact in the Treasury market.”
Nasdaq reported TLT options trading volume of 43.5 million contracts on March 20, the third-highest volume day of the month. The next Fed meeting is scheduled to conclude on Wednesday, May 1.
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