Hot new bad idea

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Ethan Wu (0:36)

Pushkin, zero day options. They're growing quickly, they're scaring people, and they expire fast, just like this intro.

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, here in the New York studio, joined today by volatility vulture, Robin Wigglesworth in Oslo.

Robin Wigglesworth (1:00)

I thought you were gonna call me a volatility vixen or something there, but-

Ethan Wu (1:04)

No, that's better, vixen, that would have been better.

Robin Wigglesworth (1:06)

That's a female fox, though. So yeah, let's say maven, maybe that sounds better, the vol maven.

Ethan Wu (1:11)

Robin, zero-day options sounds a little wonky, but it tends to be the wonky things that blow up the most dramatically in financial markets.

And these have absolutely exploded. There's no two ways about it. Citi recently published a measure showing in the last 20 days, zero-day options have reached their highest share of US options volume, 49.3%, about half of all volume in options. It's just absolutely huge.

There's a European exchange listing these zero-day options next week, they're expanding everywhere. And like anything that's grown quickly in finance, we gotta ask the question, is it gonna blow up dramatically? That's what we're talking about today. But Robin, maybe we should just start with what the hell are options?

Robin Wigglesworth (1:51)

Yeah, I mean, it's good to start at first principles and options, they sound funky, but they're basically financial derivatives. They basically work as a bet on something going up or down. So a call option is a bet on something going up and a put option is a bet on something going down. And they've been around frankly for ages, especially people used to buy them to insure against moves in pork bellies or orange juice, for example, trading places. If anyone's watched trading places, what they're trading there are futures options and other derivatives.

Typically these options would expire in maybe a year, a quarter, three months, a month, a week.

And now today we can trade zero day options, literally options that expire, keel over the die the day you buy them.

Ethan Wu (2:37)

Financial innovation, you could buy them at 10 a.m. they close at 4 p.m.

Robin Wigglesworth (2:40)

Magic.

Ethan Wu (2:41)

Financial innovation does seem a little bit like magic. These can trade on a single name, Tesla, Apple, whatever, on an index, the S&P 500 It's just like that classic option, but shorter.

And I think the appeal kind of lies in the fact that because these zero day options are so short dated, they're also really cheap. You can turn a tiny little upfront investment into a really big gain. Of course, the other side of things is that you could easily lose it all, right? That's the difference between an option on the one hand and stocks on the other. With stocks, it's very rare that you're going to lose everything, at least right away.

Whereas with an option, that could easily happen. That could happen the day you buy it.

Robin Wigglesworth (3:19)

It's like a sports bet. Like sometimes you just want to know, you just want to put money on what's going to happen in the match today, not the match in two or three weeks time, right? So it's just, if you're a day trader, sitting on Reddit and Robinhood, or frankly, a hedge fund bro somewhere, sitting in Chicago or Florida, you just want to bet on what a stock is going to do that day. And that kind of is appealing, right?

Ethan Wu (3:40)

Yeah. Oh, and I'm glad you mentioned the hedge fund bros and the Reddit punters. You know, I think a natural question to ask is, who's in this market?

Frustratingly, it's actually kind of hard to tell. The people that have looked at this closely, I disagree on exactly what the split is. I think we can say there are both everyday investors and institutional funds like hedge funds trading here. But you go on r slash WallStreetBets of 2021 meme stock fame, you see people posting their gains and losses on zero-day options. I mean, I just pulled up this one from July. This guy who took a big bet on Carvana took a $25,000 loss and posted on Reddit, I got suckered into the morning pump. The hedge funds and market makers got me. I walked right into this trap like an idiot. Enjoy the losses and have a great weekend.