Same day options — no thanks

Posted by Cardiff Garcia on Sep 10
A tip of the stetson to Bloomberg for alerting us that the CBOE has formally asked the SEC for permission to list options with expiry dates of one to four days.
From the CBOE’s filing, here is how this will work (emphasis ours):

The Exchange proposes to amend its rules to list and trade Daily Options Series. Daily Options Series will be listed on stock, exchange-traded fund (“ETF”) and exchange-traded note (“ETN”) option classes (“Equity Dailys” or “Equity Daily Options”) and on index option classes (“Index Dailys” or “Index Daily Options”) that trade on the Exchange.
On any business day, the Exchange may have trading up to four Daily Option Series on a particular option class, each of which will have consecutive expiration dates. For example, if the Exchange chooses to list four Daily Option Series on the S&P 500 Index on Monday of a week in which each day is a business day, all four of that Daily Option Series will open on Monday of that week, and the first to expire will expire on that Monday, the second to expire will expire on Tuesday of that week, the third to expire will expire on Wednesday of that week, and the fourth to expire will expire on Thursday of that week.

And here is the rationale provided by the CBOE:

The Exchange believes that Daily Option Series will provide investors with a flexible and valuable tool to manage risk exposure, minimize capital outlays, and be more responsive to the timing of events affecting the securities that underlie option contracts. In particular, the Exchange seeks to introduce Daily Option Series to provide market participants with a tool to hedge overnight and weekend risk, as well as the risk of special events such as earnings announcements and economic reports, and pay a fraction of the premium of a standard or weekly option (due to the very small time value priced into the option premium). The Exchange believes that daily expirations would allow market participants to purchase an option based on a precise timeframe thereby allowing them to tailor their investment or hedging needs more effectively.

For writers of these contracts, the margin requirements are the same as for “standard” options of the same asset class, and the Dailys will be cleared through the OCC.
Are these Dailys a good idea? Consider us (very) skeptical.
Dailys might not lead to any kind of systemic risk — central clearing and margin reqs should mitigate that possibility — but they do seem more likely to magnify volatility in the underlying indexes than to reduce it.
The CBOE argues that these contracts will give some investors the option to hedge against more specific events. But because the time value premium of these options will be definitionally negligible, these contracts will also incentivise more punters to jump in and out of the trade.
It is also unlikely that investors will venture very far out of the money given how quickly they are set to expire. And that kind of trade can get very crowded.
Translation: the closer they are to the time of expiration, the more these Dailys will become directional bets without regard to the fundamentals of the underlying indexes – purely speculative plays on spreads.

ftalphaville.ft.com/blog