As we enter the last trading days of the year and volumes are light, if we continue to see positive news, save for possible escalations in the Middle East that are impossible to predict ahead of time, it should be a rising week, as it is the famed “Santa Claus rally.” In theory, this week should deliver new highs for 2023.
The stock market rally has broadened out, and dramatically so. Even the S&P 500 Equal Weight Index (SPXEW) has reached new 52-week highs. (In contrast, at the end of October, the SPXEW was at 52-week lows.)
Based on this market action, seeing small caps and financial stocks rally significantly says the market does not anticipate a recession in 2024. The market may change its mind, but now all systems are “go.”
The post-pandemic U.S. economy seems to be hard for many economists to understand, as the expansion has managed to survive the sharpest Federal Reserve tightening cycle in 40 years. The shortage of workers is causing the unemployment rate to fall to 3.7 percent. It’s hard to be in a recession when so many people are working.
The Real Reason for Last Wednesday’s Sharp Selloff
Amid all the non-stop buying, last Wednesday’s sharp overdue correction lasted the expected one day—as has been the case for all selloffs since the late October bottom. Still, with $900 billion in notional value of zero-day-to-expiration options (0DTE) traded, one can say with a high degree of certainty that these one-day options are guilty of moving the market (for more details, see the Dec. 21, 2023, Yahoo! Finance article, “Vilified Zero-Day Options Blamed by Traders for S&P Decline”).
About 50 percent of option volume in 2023 has been 0DTE. This percentage has been growing every year since they first became available. According to TD Ameritrade’s Ticker Tape, “CBOE, the world’s largest options exchange, introduced weekly SPX options that expire on Fridays in 2005. In 2016, the exchange listed SPX weeklies that expire on Wednesdays. By 2022, CBOE had introduced weekly options with expirations on every trading day of the week. Now, qualified option traders can trade 0DTE SPX options (and options on a handful of ETFs that track the major indexes) every market day.”
Professional traders trade the 0DTE options from the short side, using many spread strategies as the decay in the value of the options is fast and horrific as they approach expiration at 4:15 p.m., even if they have intrinsic value (in-the-money). All time value and volatility go to zero by the time they expire. Retail traders buy them and while they may score big paydays from time to time, being long options that expire the same day typically doesn’t end well over time. Most traders know that the stock market trades weirdly on big option expiration (OPEX) days, which used to be once a month, or once a quarter on a Friday. Now, every day is an OPEX day with some days bigger than others, so if you are wondering why we will see sudden big swings in previously calm markets, on no news, 0DTE options are one big reason.
