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A controversial form of derivatives trading sweeping U.S. markets is spreading to Europe with the launch of so-called “zero-day” options that track an index of the continent’s largest companies.
Eurex, a derivatives exchange run by Deutsche Börse, will start offering daily options tracking the widely followed Euro Stoxx 50 stock index from Monday.
Demand for similar contracts tracking the S&P 500 has soared since the coronavirus pandemic, now accounting for more than 40% of the 2.8 million daily options that follow the U.S. equity benchmark.
So-called zero-day options are contracts that expire on the day they are purchased, allowing traders to take targeted positions in stocks around events such as economic data, corporate earnings or monetary policy meetings.
Their quick appearance has sparked concerns that they could spark daily bursts of activity that could lead to a sharp sell-off in stocks later in the session.
Eurex said it launched its contract, which expires at the end of each working day in Germany, in response to client demand. Calls for zero-day contracts have also boosted corporate profits at rival CBOE Global Markets Inc., the operator of the largest U.S. options exchange.
“The U.S. daily options market is well established and we’re seeing strong volume growth there,” said Zubin Ramdarshan, head of equity and index product design at Eurex.
Monday’s launch marks the first daily options product to track a European stock index. The closest equivalent options are Eurex weekly options, which only expire on Fridays.
Euro Stoxx 50 options are the most popular traded product on Eurex, and Ramdarshan said the exchange is also considering similar contracts for other indices, starting with the German benchmark Dax.
Lotte de Vos, head of European market structure at trading firm Optiver, said she hoped the new options “can provide a much-needed boost” to the European options market, which has struggled to grow in recent years.
“One of the key observations we made from similar products was that they not only changed the volume of monthly and weekly maturities, but also increased the total volume,” she added.
The rapid growth in the U.S. has sparked concern among some analysts and regulators that the way traders hedge the contracts they sell could fuel intraday swings in stocks and increase market volatility.
In the U.S., contracts with less than a day to expiration now account for 43% of total S&P 500 options traded, up from just 6% in 2017, according to Cboe data.
Those concerns “are justified,” CBOE said in a paper earlier this month. . . In theory,” but in practice “the risk is minimal because investors don’t all tend to trade in the same direction. “
But some doubt whether Eurex’s daily options will have the same impact in Europe, where options trading is less popular, especially among retail investors.
“We don’t expect exponential growth like the S&P [zero-day options]said UBS volatility strategist Kieran Diamond.
“Weekly expiry options on the Euro Stoxx index are far less active than standard monthly options. It’s hard to imagine [zero-day] A similar level of expansion was driven in Europe when people were not already actively trading weekly options,” he added.
Rising interest rates around the world have fueled a boom in short-term options as markets are fueled by uncertainty about how long central banks around the world will keep rates high as they try to quell inflation, Lambdashan said.
“Sudden releases of macroeconomic data such as unemployment, CPI, factory output, anything that suggests a possible pause or rate hike by the central bank . . . is super relevant for trading strategies and hedging portfolios,” he said.