The new battlefield for short-term trading! Demand for hedging is heating up, and large tech stocks are seeing a surge in zero-day options trading.

As technology giants are no longer leading the market, traders are now turning their attention to newly listed options contracts, seeking to capture short-term opportunities in some leading stocks. The expansion of the rebound in the stock market has triggered a large-scale rotation of sectors, leading to a narrowing of gains, with the S&P 500 index remaining flat so far this year. As the earnings season nears its end, traders are increasing their positions in hedging against selling risks, leading to an increase in the skewness of put options relative to call options. The conflict sparked by the U.S. attack on Iran also means that they have to consider the political consequences of GEO Group Inc. "Not only as more people seek portfolio hedging, the skewness at the S&P 500 index level is intensifying, we see that the downside risks at the individual stock level are also being priced in more, particularly in mega-cap tech stocks," said Mandy Xu, Global Head of Derivatives Market Intelligence at Cboe Global Markets Inc. "Retail traders are becoming more cautious about tech stocks, with buying activities in call options sharply declining to levels seen during the 2022 bear market." Last week, the focus of the market was on the performance of NVIDIA Corporation (NVDA.US). Although the market's obsession with the stock has cooled somewhat, it still serves as a bellwether for the wider artificial intelligence (AI) theme. As expected, with investors placing bets, derivative trading volume surged in the days leading up to the company's earnings announcement. Around 50% of NVIDIA Corporation's options trading volume was concentrated on contracts expiring on Friday before and after the company's earnings release, highlighting the market's demand for short-term contracts to speculate on specific events. There are not many individual stocks like NVIDIA Corporation that offer a wide range of short-term options. In late January this year, Cboe Global Markets Inc added options contracts expiring on Mondays and Wednesdays for some companies in the "Seven Giants" group of U.S. stocks, including Tesla, Inc. (TSLA.US) and Apple Inc. (AAPL.US). Prior to this, individual stocks only had options contracts expiring on Fridays, while indices and core ETFs had options expiring daily. A study by Barclays in early February showed that 66% of options traded on the S&P 500 index were from short-term contracts expiring daily, indicating continued popularity of short-term trading strategies for index options, suggesting that a group of traders may see similar opportunities on individual stocks. However, in zero-day trading options where options selling strategies dominate, the focus is more likely to remain on the index level rather than individual stocks. Indices naturally provide diversification and can reduce the risk of sudden, large fluctuations. On individual stocks, non-systematic "gap" risks can pose potential threats to the safety of funds. Garrett DeSimone, Director of Quantitative Research at option analysis firm OptionMetrics, stated that selling zero-day options on individual stocks "is not without significant tail risk," meaning the risk of extreme negative trends. He pointed out that this extreme volatility risk in large-cap tech stocks - which can lead to huge losses for options sellers, or what he calls statistical skewness - is "extremely significant" compared to indices. He added, "For any funds trying to implement a systematic strategy to sell volatility on zero-day options in such individual stocks, this can clearly bring challenges in risk management." At the index level, when the flow of zero-day options funds puts market makers in a net gamma long position, market makers sell on upticks and buy on downticks to dynamically hedge, this systematic options selling behavior can dampen intraday volatility in the S&P 500. While the diversification property of indices structurally supports this mechanism, if short positions in zero-day options start to dominate trading, high liquidity in mega-cap tech stocks may also experience a similar suppressive effect on intraday volatility, although the stability may be weaker. DeSimone also believes that although the variance risk premium of the current "Seven Giants" is at a high level, with the continuous increase in trading volume, this premium is likely to narrow in the future. He stated, "With the increased activity in options expiring on Mondays and Wednesdays, it is expected that this premium will be compressed in the next 6 to 7 months."