Abstract: Trading in 0-Days-To-Expiry (0DTE) options has grown exponentially over the last few years. After describing this exploding market, we present novel closed-form pricing formulae that accurately capture the 0DTE implied-volatility surface. We use a local-in-time approach, relying on Edgeworth-like expansions of the log-return characteristic function, explicitly suited to price ultra-short-tenor instruments. The expansions provide skewness and kurtosis adjustments which depend on the underlying non-affine return characteristics in closed form. We show significant improvements in pricing and hedging as compared to state-of-the-art models. We conclude by providing suggestive results on nearly instantaneous predictability by estimating 0DTE-based risk premia.
Dmitriy Muravyev, University of Illinois-Urbana-Champaign
Abstract: The recent surge in retail option trading has sparked concerns about trading motives and significant losses. To evaluate these concerns, we offer the first trader-level analysis of modern retail option trading by introducing a novel data set of $15 billion in retail stock and option trades. Option trades constitute over one-third of all trades, are concentrated in a few underlyings, especially the S&P 500 index, and are dominated by short-term purchases. Surprisingly, option trades incur relatively small losses despite wide bid-ask spreads. Retail investors use options to participate in high-priced underlyings, with limited evidence of leverage or skewness-seeking in realized trade returns. While our average retail investor is relatively sophisticated, results remain robust across investor subsamples.
Abstract: We analyze the information content of a variance risk premia extracted from the
weather derivatives contracts written on the local temperature of individual U.S. cities. We term this the Weather Variance Risk Premia (WVRP). By constructing the WVRP measure from the CME’s weather futures and options contracts, we examine the role of weather variance risk on bond credit spreads of local corporations and municipalities. Our results indicate informativeness of weather derivatives market as a local risk factor priced in the bond returns of local corporations and municipalities. Our results are robust to controlling state level economic uncertainty measures.
Discussant: Aurelio Vasquez, Instituto Tecnológico Autónomo de México
