7/22/2025

As markets rise, previous restrictive rules are discarded. The 'What Me Worry' attitude takes hold. The Fear of Missing Out FFOMO becomes widespread. This is a result of positive mood which propels markets higher and higher.

The story of zero day to expiration ODTE options is a case in point. Here is an excerpt from the NASD page in an article encouraging everyone to do this titled Why You Should Trade ODTE Options. Two paragraphs stood out to me

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In 2005, the CBOE introduced weekly options, allowing investors to trade 0DTE once a week. Shortly after, Monday and Wednesday options were added. Then in 2022, 0DTE options on the SPX and SPDR S&P 500 ETF Trust (SP) were added for all five trading days.

Due to the addition of 0DTE options for each day of the trading week, their volume has skyrocketed. According to Goldman Sachs, almost half of the trading volume on the SPX is 0DTE trades. 

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Yes half the trading volume of the SPX are ODTE trades! 

No one trading these options is investing in anything like MSfT or IBM. They are merely betting an a daily direction and magnitude. And in one day! John Templeton must be rolling in his grave.

Click above underlined to see entire article. Sure half the trade are sells taking in option premium.But the other half are buys, betting on the direction and magnitude of this move today. 

Notice the timing of the introduction of more risky options. By 2005 the market had recovered from  the dot.com bust which ended in 2002. The market would rally into the sub prime bust beginning 2007. The Covid low occurred in early 2020 at 2250. By 2022 the SPX had risen to 4750, happy days are here again.  And so mood was positive to support the introduction of even more daring trades!  Social mood theory holds that the past is unremembered, here is a great example just two years later. 

My point is that the rules against risk come off at market highs. In the aftermath of the ensuing market decline, rules are enacted to 'make sure it won't happen again.'  The classic example is the passage of the Investment Company Acts of 19363 & 1934. The 1934 Act created the SEC, a first for government regulation of securities markets. SARBOX in 2002 and Dodd Frank in 2010 followed the lows of 2002 and  2009. 

At past market peaks the focus was on particular stocks, RCA in 1929, IBM in 1966, dot.coms in 1999, Mag 7 now, but half the trading volume in something that is a derivative?

Typically exchanges and brokerages do not encourage risky trades, think long term investing, Warren Buffet and John Templeton.  Here though an exchange is touting another exchange, the CBOE. One only sees such activity at market peaks.  The article then makes this incorrect comment. 

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Generally, selling 0DTE options is the most popular, as any 0DTE option that is out-of-the-money (OTM) upon expiration will be worth nothing. Since expiration is the same day, betting on them ending OTM is a high win rate strategy.

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The grammar is incorrect there are two choices buy or sell so it should read selling is more popular. But that would still be incorrect. For every sell there has to be a buy or purchase or there would be no one to sell to. So it is impossible that selling is more popular. 

At market highs new terms are invented to highlight the latest fad.  Fire example, a strategy called portfolio insurance was in vogue in 1987. When the crash came that October 19087, it was later determined that the existence of so-called Insurance, actually accelerated the decline.  The article goes on to discuss the Iron Condor and the Iron Butterfly. I won't go into the details but one has to be thoroughly versed in option lingo and strategy to understand the message.  During the hey day of Tulip mania in 1634 such option trading was also in vogue.  As the wiki article states, it all collapsed in 1637. All those who bet long the tulip bulb market lost their money. 

Socionomics or social mood theory is not a crystal ball, it is more a windsock. But there appears to be the same sort of manic involvement now that we have seen at past market tops.

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